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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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FORM 20-F

| |  |       |                                                                                                                                                                                 | 
| |  | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | (   ) | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR                                                                              
| |  | (X)   | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR                                            
| |  | (   ) | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-12131

CANON KABUSHIKI KAISHA(Name of Registrant in Japanese as specified in its charter)

CANON INC.(Name of Registrant in English as specified in its charter)

JAPAN(Jurisdiction of incorporation or organization)

30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

|                    |  |                                                                         |  |                        
|------------------- |  | ----------------------------------------------------------------------- |  | -----------------------
|Title of each class |  | Name of each exchange on which registered                              
|                    |  |                                                                        
|(1)                 |  | Common Stock (the shares)                                             |  | New York Stock Exchange
|(2)                 |  | American Depositary Shares (ADSs), each of which represents one share |  | New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None
(Title of Class)



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Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.
None
(Title of Class)



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* American Depositary Receipts for 50,000,000 American Depositary Shares,
each American Depositary Share representing 1 share of common stock of
Canon Inc., were registered under the Securities Act of 1933.

Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of the close of the period covered by the
annual report.

As of December 31, 2003,
881,338,645 shares of common stock, including 27,717,736
ADSs, were outstanding.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

|       |  |   
|------ |  | --
|Yes  X |  | No

Indicate by check mark which financial statement item the registrant has
elected to follow.

|           |  |        
|---------- |  | -------
|Item 17  X |  | Item 18





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TABLE OF CONTENTS Page numberCERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL
INFORMATION
    
    
    1FORWARD-LOOKING INFORMATION
    
    
    1PART IItem 1. Identity of Directors, Senior Management and Advisers
    
    
    2Item 2. Offer Statistics and Expected Timetable
    
    
    2Item 3. Key Information
    
    
    2A. Selected financial data
    
    
    2B. Capitalization and indebtedness
    
    
    3C. Reasons for the offer and use of proceeds
    
    
    3D. Risk factors
    
    
    3Item 4. Information on the Company
    
    
    9A. History and development of the Company
    
    
    9B. Business overview
    
    
    10Products
    
    
    10Marketing and distribution
    
    
    12Service
    
    
    12Net sales by product group and geographic area
    
    
    13Seasonality
    
    
    13Sources of supply
    
    
    13Competition
    
    
    14Patents and licenses
    
    
    15Environmental regulations
    
    
    15C. Organizational structure
    
    
    17D. Property, plants and equipment
    
    
    18Item 5. Operating and Financial Review and Prospects
    
    
    21A. Operating results
    
    
    21Overview
    
    
    21Critical accounting policies and estimates
    
    
    22Consolidated result of operations
    
    
    24Fiscal 2003 compared with fiscal 2002
    
    
    24Fiscal 2002 compared with fiscal 2001
    
    
    29Foreign operations and foreign currency transactions
    
    
    33Recent developments
    
    
    33B. Liquidity and capital resources
    
    
    34Liquidity
    
    
    34Capital resources
    
    
    34C. Research and development, patents and licenses, etc.
    
    
    35D. Trend information
    
    
    36Trend information
    
    
    36Forward looking statements
    
    
    36E. Off-balance sheet arrangements
    
    
    36F. Contractual obligations
    
    
    37Item 6. Directors, Senior Management and Employees
    
    
    38A. Directors and senior management
    
    
    38B. Compensation
    
    
    42C. Board practices
    
    
    42D. Employees
    
    
    43E. Share ownership
    
    
    44Item 7. Major Shareholders and Related Party Transactions
    
    
    45A. Major shareholders
    
    
    45B. Related party transactions
    
    
    45C. Interests of experts and counsel
    
    
    45
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##### Table of Contents



Item 8. Financial Information
    
    
    46A. Consolidated statements and other financial information
    
    
    46Consolidated statements
    
    
    46Legal proceedings
    
    
    46Dividend policy
    
    
    46B. Significant changes
    
    
    46Item 9. The Offer and Listing
    
    
    47A. Offer and listing details
    
    
    47Trading in domestic markets
    
    
    47Trading in foreign markets
    
    
    48B. Plan of distribution
    
    
    48C. Markets
    
    
    48Item 10. Additional Information
    
    
    49A. Share capital
    
    
    49B. Memorandum and articles of association
    
    
    49C. Material contracts
    
    
    53D. Exchange controls
    
    
    53E. Taxation
    
    
    54F. Dividends and paying agents
    
    
    56G. Statement by experts
    
    
    56H. Documents on display
    
    
    56I.   Subsidiary information
    
    
    56Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    56Market risk exposures
    
    
    56Equity price risk
    
    
    56Foreign exchange rate and interest rate risk
    
    
    57Item 12. Description of Securities Other than Equity Securities
    
    
    59PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    59Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
    
    
    59Item 15. Controls and Procedures
    
    
    60Item 16A. Audit Committee Financial Expert
    
    
    60Item 16B. Code of Ethics
    
    
    60Item 16C. Principal Accountant Fees and Services
    
    
    61PART IIIItem 17. Financial Statements
    
    
    62Report of Independent Registered Public Accounting Firm
    
    
    63Consolidated Balance Sheets
    
    
    64Consolidated Statements of Income
    
    
    65Consolidated Statements of Stockholders Equity
    
    
    66Consolidated Statements of Cash Flows
    
    
    67Notes to Consolidated Financial Statements
    
    
    68Valuation and Qualifying Accounts
    
    
    103Item 18. Financial Statements
    
    
    104Item 19. Financial Statements and Exhibits
    
    
    104SIGNATURES
    
    
    105EXHIBIT INDEX
    
    
    106EX-1.1 Articles of IncorporationEX-1.2 Regulations of the Board of DirectorsEX-2 Regulations for Handling of SharesEX-11.1 Canon Group Code of ConductEX-11.2 Code of EthicsEX-12 302 CertificationEX-13 906 Certification
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CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION All information contained in this Annual Report is as of December 31, 2003
unless otherwise specified. References in this discussion to the Company are to Canon Inc. and, unless
otherwise indicated, references to the financial condition or operating results
of
Canon refer to Canon Inc. and its consolidated subsidiaries. On March 31, 2004, the noon buying rate for yen in New York City as reported by
the Federal Reserve Bank of New York was
Yen104.18 = U.S.$1. The Companys fiscal year end is December 31. In this Annual Report fiscal
2003 refers to the Companys fiscal year ended December 31, 2003, and other
fiscal years of the Company are referred to in a corresponding manner. 
 FORWARD-LOOKING INFORMATION This Annual Report contains forward-looking statements and information relating
to Canon that are based on beliefs of its management as well as
assumptions made by and information currently available to Canon Inc. When used
in this document, the words anticipate, believe, estimate,
expect, intend, may, plan, project and should and similar
expressions, as they relate to Canon or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
and assumptions of the Company with respect to future events and are subject to
risks and uncertainties. Many factors could cause the actual results,
performance or achievements of Canon to be materially different from any
future results, performance or achievements that may be expressed or implied by
such forward-looking statements, including, among others, changes in
general economic and business conditions, changes in currency exchange rates
and interest rates, introduction of competing products by other companies,
lack of acceptance of new products or services by Canons targeted customers,
inability to meet efficiency and cost reduction objectives, changes in
business strategy and various other factors, both referenced and not referenced
in this Annual Report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected, intended, planned or projected. Canon Inc. does
not intend or assume any obligation to update these forward-looking statements. 1




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PART I 
 Item 1.   Identity of Directors, Senior Management and Advisers Not applicable. 
 Item 2.   Offer Statistics and Expected Timetable Not applicable. 
 Item 3.   Key Information 
 A.   Selected financial data The following selected consolidated financial data has been derived from
the consolidated financial statements of Canon as of each of the dates and
for each of the periods indicated below. This information should be read in
conjunction with and qualified in its entirety by reference to the Consolidated
Financial Statements of Canon Inc. and subsidiaries, including the notes
thereto, included in this Annual Report, which have been audited by KPMG AZSA &
Co., Independent Registered Public Accounting Firm. Selected financial data*1:
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999(Millions of yen except average number of shares and per share data)Net sales
    
    Yen
    3,198,072
    
    
    Yen
     2,940,128
    
   
    Yen
    2,907,573
    
    
    Yen
    2,696,420
    
    
    Yen
    2,530,896Operating profit
    
    
    454,424
    
    
    
    346,359
    
    
    
    281,839
    
    
    
    234,131
    
    
    
    168,344Income before cumulative effect
of change in accounting
principle
    
    
    275,730
    
    
    
    190,737
    
    
    
    163,869
    
    
    
    134,088
    
    
    
    70,234Net income
    
    
    275,730
    
    
    
    190,737
    
    
    
    167,561
    
    
    
    134,088
    
    
    
    70,234Advertising
    
    
    100,278
    
    
    
    71,725
    
    
    
    66,837
    
    
    
    67,840
    
    
    
    67,544Research and development
    
    
    259,140
    
    
    
    233,669
    
    
    
    218,616
    
    
    
    194,552
    
    
    
    177,922Depreciation
    
    
    168,636
    
    
    
    158,469
    
    
    
    147,286
    
    
    
    144,043
    
    
    
    155,682Capital expenditure
    
    
    210,038
    
    
    
    198,702
    
    
    
    207,674
    
    
    
    170,986
    
    
    
    200,386Long-term debt
    
    
    59,260
    
    
    
    81,349
    
    
    
    95,526
    
    
    
    142,925
    
    
    
    165,277Common stock
    
    
    168,892
    
    
    
    167,242
    
    
    
    165,287
    
    
    
    164,796
    
    
    
    163,969Stockholders equity
    
    
    1,865,545
    
    
    
    1,591,950
    
    
    
    1,458,476
    
    
    
    1,298,914
    
    
    
    1,202,003Total assets
    
    
    3,182,148
    
    
    
    2,942,706
    
    
    
    2,844,756
    
    
    
    2,832,125
    
    
    
    2,587,532Average number of shares
(Thousands)
    
    
    878,649
    
    
    
    876,716
    
    
    
    875,960
    
    
    
    872,606
    
    
    
    870,699Per share data:Income before cumulative effect
of change in accounting
principle:Basic
    
    Yen
    313.81
    
    
    Yen
     217.56
    
   
    Yen
    187.07
    
    
    Yen
    153.66
    
    
    Yen
    80.66Diluted
    
    
    310.75
    
    
    
    214.80
    
    
    
    184.55
    
    
    
    151.51
    
    
    
    79.50Net income:Basic
    
    Yen
    313.81
    
    
    Yen
     217.56
    
   
    Yen
    191.29
    
    
    Yen
    153.66
    
    
    Yen
    80.66Diluted
    
    
    310.75
    
    
    
    214.80
    
    
    
    188.70
    
    
    
    151.51
    
    
    
    79.50Cash dividends declared
    
    
    50.00
    
    
    
    30.00
    
    
    
    25.00
    
    
    
    21.00
    
    
    
    17.00Cash dividends declared (U.S.$)*2
    
    $
    0.464
    
    
    $
    0.254
    
    
    $
    0.196
    
    
    $
    0.179
    
    
    $
    0.164
 Notes: 1.
    
    The above financial data are provided in conformity with accounting
principles generally accepted in the United States of America.2.
    
    Annual cash dividends declared (U.S.$) translated from yen based on a
weighted average of the noon buying rates for yen in New York city
as reported by the Federal Reserve Bank of New York in effect on the date
of each semiannual dividend payment. 2




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The following table provides the noon buying rates for Japanese yen in New
York City as reported by the Federal Reserve Bank of New York expressed in
Japanese yen per U.S.$1 during the periods indicated and the high and low noon
buying rates for Japanese yen per U.S.$1 during the months indicated. Yen exchange rates per U.S. dollar:
    
    Average
    
    Term end
    
    High
    
    Low1999
    
    Yen
    112.79
    
    
    Yen
    102.16
    
    
    Yen
    101.53
    
    
    Yen
    124.452000
    
    
    108.37
    
    
    
    114.35
    
    
    
    101.70
    
    
    
    114.622001
    
    
    122.18
    
    
    
    131.04
    
    
    
    114.26
    
    
    
    131.472002
    
    
    124.81
    
    
    
    118.75
    
    
    
    115.71
    
    
    
    134.772003  Year
    
    
    115.83
    
    
    
    107.13
    
    
    
    106.93
    
    
    
    121.421(st) half
    
    
    
    
    
    
    119.87
    
    
    
    115.94
    
    
    
    121.42July
    
    
    
    
    
    
    120.42
    
    
    
    117.24
    
    
    
    120.55August
    
    
    
    
    
    
    116.71
    
    
    
    116.71
    
    
    
    120.47September
    
    
    
    
    
    
    111.43
    
    
    
    111.07
    
    
    
    117.41October
    
    
    
    
    
    
    110.10
    
    
    
    108.18
    
    
    
    110.90November
    
    
    
    
    
    
    109.53
    
    
    
    107.98
    
    
    
    111.20December
    
    
    
    
    
    
    107.13
    
    
    
    106.93
    
    
    
    109.612004  January
    
    
    
    
    
    
    105.84
    
    
    
    105.52
    
    
    
    107.17February
    
    
    
    
    
    
    109.26
    
    
    
    105.36
    
    
    
    109.59March
    
    
    
    
    
    
    104.18
    
    
    
    104.18
    
    
    
    112.12April
    
    
    
    
    
    
    110.37
    
    
    
    103.70
    
    
    
    110.37
 
 B.   Capitalization and indebtedness Not applicable. 
 C.   Reasons for the offer and use of proceeds Not applicable. 
 D.   Risk Factors Canon is one of the worlds leading manufacturers of plain paper copying
machines, digital multifunction devices, laser beam printers, inkjet
printers, cameras, steppers and aligners. Primarily because of the nature of the business areas and geographical
areas in which Canon operates and the highly competitive nature of the industry
to which it belongs, Canon is exposed to a variety of risks and uncertainties
in carrying out its businesses, including, but not limited to, the following: Risks Related to Canons Industries Canon has invested and will continue to invest heavily in next-generation
technologies. If the market for these technologies does not develop as Canon
expects or if its competitors produce these or competing technologies in a more
timely or effective manner, Canons operating results could be materially
adversely affected. Canon has made and will continue to make investments in next-generation
technology research and development initiatives. Canons competitors may
achieve research and development breakthroughs in these technologies more
quickly than Canon, or may achieve advances in competing technologies that
render products under development by Canon uncompetitive. In addition to evolution in technologies, Canon has increased the size of
its investment in development and manufacturing. If an inconsistency arises
between Canons business strategies and market needs, Canon may not recover a
substantial part of its investment, and lose business opportunities, both of
which may materially affect Canons operating results. Canons businesses, especially the digital multifunction device and camera
businesses in which Canon operates, is highly competitive. Presently, the analog copying machines and conventional film camera
segments of the market are mature, with anticipated declining industry revenues
as the market transitions to digital technology. Some of Canons new digital
products replace or compete with its traditional analog products. Changes in
the mix of products from analog to digital, and the pace of that change as well
as competitive developments could cause actual results to vary from those
expected. The recent trend of rapid digitalization has lowered the entry barriers in
the digital camera segment, resulting in the entry of new competitors such as
electronics manufacturers and an overall increase in the number of competitors
to Canons business. Although Canon believes that it has successfully kept pace
with this trend toward digitalization, it may not be able to compete
successfully in the future if it does not continue to invest in R&D activities,
implement cost-cutting measures and introduce attractive and high value-added
products to the market on a continuous basis. In addition, the emergence of strong and unexpected competitors through
merger and acquisition or the formation of partnerships may change the
competitive environment of the businesses in which Canon engages, thereby
affecting Canons future results of operations. Canons camera and printer business depends upon seasonal consumer
spending. Sales of Canons camera and printer products, particularly in the U.S.,
European and Japanese consumer markets, may be subject to seasonality. As a
result, product sales may be impacted by seasonal purchasing patterns with
higher sales generally occurring in the second half of the calendar year. 3




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If Canon does not effectively manage transitions in its products and
services, its revenue may decline. Many of the businesses in which Canon competes are characterized by rapid
technological advances in hardware performance, software functionality and
product features; the frequent introduction of new products; short product life
cycles; and continual improvement in product price characteristics relative to
product performance. If Canon does not make an effective transition from
existing products and services to new offerings, its revenue may decline. Among
the risks associated with the introduction of new products and services are
delays in development or manufacturing, variations in costs, delays in customer
purchases in anticipation of new introductions, difficulty in predicting
customer demand for new offerings and difficulty of effective management of
inventory levels in line with anticipated demand. Canons revenue and gross margin also may suffer due to the timing of
product or service introductions by its competitors. This is especially
challenging when a product has a short life cycle or a competitor introduces a
new product just before Canons introduction of a similar product. Furthermore,
sales of Canons new products and services may replace sales of, or result in
discounting of, some of its current offerings, sometimes offsetting the benefit
of even the introduction of a successful new product or service. Canon must
also manage duplicative or overlapping products and operations. Given the
competitive nature of Canons businesses, if any of these risks materialize,
future demand for its products and services and consequently, its results of
operations, may suffer. Because the semiconductor industry is highly cyclical, Canon may be
adversely affected by any downturn in the industry. The semiconductor industry is characterized by up and down business
cycles, the timing, length and volatility of which are difficult to predict.
Recurring periods of oversupply of integrated circuits have led at times to
significantly reduced demand for capital equipment, including the steppers and
aligners Canon produces. Despite this cyclicality, Canon must maintain
significant levels of research and development expenditures in order to
maintain its competitive position. Canons business and operating results could
be materially adversely affected by future downturns in the semiconductor
industry and related fluctuations in the demand for capital equipment in
general, and particularly by memory manufacturers. Downturns in the semiconductor industry have caused Canons customers to
change their operational strategies, which in turn may affect Canons business. Many device manufacturers have changed their business models to focus on
designing of semiconductors, while consigning the production of semiconductors
to lower cost foundries. Canon cannot accurately predict the future effect of
these trends on its business. However, as R&D, manufacturing and sales
activities become increasingly globalized in response to these trends, shifting
particularly to emerging markets, unexpected developments, such as adverse
regulatory or legal changes and unanticipated events, such as natural
disasters, may adversely affect Canons business operations. The semiconductor equipment industry is characterized by rapid
technological change. If Canon does not constantly develop new products to keep
pace with technological change and meet its customers requirements, Canon may
lose customers and its business may suffer. Canons steppers and mask aligners are affected by rapid technological
change and can quickly become obsolete. Canon believes its future success in
the
steppers and aligners business depends on its ability to continue to enhance
its existing products and develop new products using new and more advanced
technologies. In particular, as semiconductor pattern sizes continue to
decrease, the demand for more technologically advanced steppers is likely to
increase. Although Canon will continue to offer cost effective products by managing
manufacturing costs for its technology, Canons existing stepper and mask
aligner products could become obsolete sooner than anticipated because of
faster than anticipated changes in one or more of the technologies related to
Canons products or in the market demand for products based on a particular
technology. Any failure by Canon to develop the advanced technologies required
by its customers at progressively lower costs and to supply sufficient
quantities to a worldwide customer base could adversely affect Canons net
sales and profitability. Risks Related to Canons Business Canon derives a significant percentage of its revenues from
Hewlett-Packard. Canon depends on Hewlett-Packard for a significant part of its business.
For fiscal 2003, approximately 20% of Canons net sales were to
Hewlett-Packard. As a result, its business, results of operations and financial
condition may be affected by the policies, business, results of operations and
financial condition of Hewlett-Packard. Any decision by Hewlett-Packard
management to limit or reduce the scope of its relationship with Canon would
adversely affect Canons results of operations. Canon depends on a limited number of suppliers for certain key components. Canon relies on a limited number of outside vendors which meet Canons
strict criteria for quality, efficiency and environmental friendliness for
certain critical components used in its products. Canons reliance on a limited
number of suppliers involves several risks, including a potential inability to
obtain an adequate supply of required components, the risk of untimely delivery
of these subassemblies and components, and the risk for a substantial increase
in price of these components to occur. 4




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Although competition is increasing in the market for sales of supplies and
services following initial product placement, given Canons high market share
in sales of such supplies, Canon may be subject to antitrust-related suits,
investigations or proceedings which may adversely effect its operating results
or reputation. A portion of our net sales consists of sales of supplies and the provision
of services occurring after the initial equipment placement. As these supplies
and services have become more commoditized, the number of competitors in these
markets has increased. Our success in maintaining these post-placement sales
will depend on our ability to compete successfully with these competitors, some
of which may offer lower-priced products or services. Despite the increase in competitors as described above, Canon currently
possesses a high market share in the market for supplies. Accordingly, Canon
may be subject to suits, investigations or proceedings under relevant antitrust
laws and regulations. Any such suits, investigations or proceedings may lead to
substantial costs and have an adverse effect on Canons operating results or
reputation. Moreover, any legal or regulatory proceedings to which Canon is
subject could require significant involvement of its senior management and may
divert management attention from its business and operations. For more
information about current legal proceedings, see Item 8.A. Financial
Information  Consolidated Statements and Other Financial Information  Legal
Proceedings. Cyclical patterns in sales of Canons products makes planning and
inventory management difficult and future financial results less predictable. Canon generally experiences seasonal trends in the sale of its consumer-
oriented products. The resulting uneven sales pattern makes it difficult to
predict
near-term demand and places pressure on Canons inventory management and
logistics systems. If predicted demand is substantially greater than actual
orders, there will be excess inventory, thereby putting downward pressure on
selling prices and reducing Canons revenue. Alternatively, if orders
substantially exceed predicted demand, Canons ability to fulfill orders may be
limited, which could adversely affect net sales and increase the risk of
unanticipated variations in its results of operations and financial condition.
Many of the factors that create and affect seasonal trends are beyond Canons
control. The cost of producing new products is initially high, and if such new
products are not successful or if Canon fails to achieve cost reductions over
time, Canons gross profits may be adversely affected. The unit cost of Canons products has historically been the highest when
they are newly introduced into production and have at times had a negative
impact on its gross profit, operating results and cash flow. Cost reductions
and enhancements typically come over time through:  
    
    engineering improvements;
    
    economies of scale;
    
    improvements in manufacturing processes; and
    
    improved serviceability of products. Initial shipments of Canons new products adversely affect its profit or
cash flow, and if sales of such new products are not successful, Canon may be
unable thereafter to improve its gross profit, operating results and cash flow. Canon is subject to financial and reputational risks due to product
quality and liability issues. Although Canon has established a Quality Risk Management Division to
coordinate its efforts to minimize risks that may arise from product quality
and liability issues, there can be no assurance that Canon will be able to
eliminate or mitigate occurrences of these issues and consequent damages. If
such factors adversely affect Canons operating activities, generate expenses
such as those for product recalls, service, and compensation, or hurt its brand
image, its financial results and condition or reputation for quality products
may be adversely affected. Canons success depends on the value of its brand name, and if the value
of the brand name were to diminish, its revenues, operating results and
prospects would be adversely affected. Canons success in its markets depends in part on Canons brand name and
its value. In addition, as a manufacturer and distributor of consumer products,
Canons operating results are susceptible to adverse publicity regarding the
quality of its products. There can be no assurance that such adverse publicity
will not occur or that such claims will not be made in the future. Furthermore,
Canon cannot predict the impact of such adverse publicity on its business,
financial condition and results of operations. Canon depends on the attraction and retention of key personnel and highly
qualified professionals. Canons future operating results depend in significant part upon the
continued contributions of its engineers and key employees. In addition,
Canons future operating results depend in part on its ability to attract,
train and retain other qualified management, technical, sales and support
personnel for Canons operations. The competition for these people in the
high-tech industries in which Canon competes has become increasingly intense in
recent years. Moreover, due to the accelerating pace of technological change,
it has become increasingly difficult to train new personnel in time to meet
product research and development requirements. The loss of key employees or
Canons inability to attract, retain, train and motivate qualified personnel
could adversely affect Canons business, financial condition and results of
operations. 5




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Canons physical facilities, information systems and information security
systems are subject to damage as a result of disasters, outages or similar
events. Canons headquarters functions, its information systems and its research
and development centers are located in or near Tokyo, Japan, where the
possibility of disaster or damage from earthquakes is generally higher than in
other parts of the world. In addition, Canons facilities or offices, including
those for research and development, material procurement, manufacturing,
logistics, sales, and services are located throughout the world and subject to
the possibility of disaster or outage or similar disruption as a result of any
of a number of events, including natural disasters, computer viruses and
terrorist attacks. Although Canon is working to establish appropriate backup
structures for its facilities and information systems, there is no assurance
that Canon will be able to completely prevent or mitigate the effect of events
or developments such as the aforementioned disasters, leakage of harmful
substances, shutdowns of information systems, and leakage, falsifications, and
disappearances of internal databases. If such factors adversely affect Canons
operating activities, generate expenses relating to physical or personal
damage, or hurt Canons brand image, its consolidated financial results and
condition may be adversely affected. A substantial portion of Canons business activity is conducted outside
Japan, exposing Canon to the risks of international operations. A substantial portion of Canons business activity is conducted outside
Japan, including in developing and emerging markets in Asia. There are a
number of risks inherent in doing business in those markets, including the
following:  
    
    less developed technological infrastructure, which can affect production or other activities or result in lower customer acceptance of Canons services;
    
    difficulties in recruiting and retaining personnel;
    
    potentially adverse tax consequences;
    
    longer payment cycles;
    
    unfavorable political or economic factors; and
    
    unexpected legal or regulatory changes. Canons inability to manage successfully the risks inherent in its
international activities could adversely affect its business, financial
condition and operating results. In order to produce Canons products competitively and to reduce costs, Canon
has established production facilities in China. Canon is also focusing on
strengthening its sales activity in China. However, with Chinas entry into the
WTO, conditions within China are in the process of changing. Under these
conditions, unexpected events, including political or legal change, labor
shortage or strikes or changes in economic conditions, may occur. In addition, the spread of an epidemic disease such as severe acute
respiratory syndrome (SARS) in China spread in elsewhere in Asia could have a
negative effect on Canons business activity. Canon has previously imposed
travel restrictions to and from, certain countries affected by SARS, and
similar medical crises in the future may disrupt manufacturing processes and
markets for Canons products. Given the importance of Canons Asian sales,
production facilities and supply relationships, especially in China, Canons
business may be more exposed to this risk than the global economy generally. Canon may unintentionally infringe trade international trade laws and
regulations, and any such infringement may lead to an adverse effect on its
business. The extent of the effect on Canons business will depend upon the
nature of the infringement and the severity of fines or other sanctions that
might be imposed upon Canon. A major infringement could result in the
temporary suspension of Canons trading rights. In addition to any sanctions
prescribed by law, publicity regarding alleged infringement of trade laws and
regulations by Canon may also have a negative effect on the Canons brand and
image. All of the above factors regarding international operations could have
an adverse impact on Canons business results and financial condition. Recent increases in counterfeit Canon products may adversely affect
Canons brand image and its revenues. In recent years, Canon has noticed a worldwide increase in the emergence
of counterfeit Canon products. Such counterfeit products may diminish Canons
brand name, particularly if purchasers of such products are unaware of their
counterfeit status and perceive poor product quality. Canon has been taking
measures to halt the spread of counterfeit products. However, there is no
assurance that such measures will be successful, and the continued production
and sale of such products could negatively affect Canons brand image as well
as its revenues. 6




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Canon may be subject to intellectual property litigation and infringement
claims, which could cause it to incur significant expenses or prevent it from
selling its products. Because of the emphasis on product innovation in the markets for Canons
products, many of which are subject to frequent technological innovations,
patents and other intellectual property are an important competitive factor.
Canon relies primarily on technology it has developed, and Canon seeks to
protect such technology through a combination of patents, trademarks and other
intellectual property rights. Canon faces the risks that:  
    
    competitors will be able to develop similar technology independently;
    
    Canons pending patent applications may not be issued;
    
    the steps Canon takes to prevent misappropriation or infringement of its intellectual property may not be successful; and
    
    intellectual property laws may not adequately protect Canons intellectual property, particularly in some countries outside Japan. While Canon is not aware of any actual or potential significant impairment
of, or adverse claim to, its rights in such technologies, any interference in
Canons rights to use such technologies could adversely affect its financial
condition and operating results. In addition, Canon may need to litigate in order to enforce its patents,
copyrights or other intellectual property rights, to protect its trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement, which can be expensive and
time-consuming. In the event any government agency or third party were
adjudicated to have a valid claim against Canon, Canon could be required to:  
    
    refrain from selling the affected
product in certain markets;
    
    make royalty payments or pay monetary damages;
    
    seek to develop non-infringing technologies, which may not be feasible; or
    
    seek to acquire licenses to the infringed technology, which may not be available on commercially reasonable terms, if at all. Canon also licenses its patents to third parties in exchange for payment
or cross-licensing. The terms and conditions of such licensing or changes in
the conditions for renewals of such licenses could affect Canons business. Canons businesses, company image and result of operations could be
adversely affected by any of these developments. Disputes involving payment of consideration for employee inventions may
materially affect Canons brand image as well as its business. Canon may face disputes involving payment of consideration given to
employee inventions for which the intellectual property rights have been
transferred to Canon. This risk is particularly relevant in countries such as
Japan and Germany, where patent laws require companies to pay consideration to
employees for the assignment of the employees invention to the company. Canon
maintains company rules on and an evaluation system for employee inventions.
Canon believes it has been making adequate payments to employees for assignment
of inventions based on these rules and a fair and objective assessment of
amounts to be paid. Nevertheless, a former employee initiated a suit in
November 2003, demanding an increase in the amount paid for an invention, and
the suit is currently being adjudicated. The occurrence and outcome of such
disputes could affect Canons business as well as its operations. Canons business is subject to environmental laws and regulations. Canon is subject to certain Japanese and foreign environmental
requirements in areas such as energy resource conservation, reduction of
hazardous substances, collection and recycling of products, clean air, water
protection and waste disposal. Canon believes that it has taken adequate
precautions to comply with these regulations in the course of its ordinary
business operations. Furthermore, Canon does not believe that any environmental
laws or regulations currently in effect will have a material adverse effect on
its operating results or financial condition. However, Canon cannot predict
whether any pending or future legislation will be adopted or what effect such
legislation would have on it. Environmental clean-up and remediation costs relating to Canons
properties and associated litigation could decrease Canons net cash flow,
adversely affect its results of operations and impair its financial condition. Canon is subject to liability for the investigation and clean-up of
environmental contamination at each of the properties that it owns or operates,
at certain properties Canon formerly owned or operated and at off-site
locations where Canon arranged for the disposal of hazardous substances. If
Canon were to be held responsible for damages in any future litigation or
proceedings, such costs may not be covered by insurance and may be material. In addition, Canon may face liability for alleged personal injury or
property damage due to exposure to chemicals or other hazardous substances at
or from its facilities. Canon may also face liability for personal injury,
property damage, natural resource damage or for clean-up costs for the alleged
migration of contamination or other hazardous substances from its facilities. A
significant increase in the number or success of these claims and costs could
adversely affect its results of operations or financial condition. 7




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Economic trends in Canons major markets may adversely affect its net
sales. Economic downturns and declines in consumption in Canons major markets,
including Japan, the United States and Europe, may affect the levels of both
corporate and consumer sales. Purchases of Canons consumer products, such as
cameras and printers, are to a very significant degree discretionary. A decline
in the level of consumption caused by the worsening of general economic
conditions could adversely affect Canons results of operations. Canons operating results are also affected by the level of business
activity of its customers, which in turn is affected by the level of economic
activity in the industries and markets that they serve. A decline in the level
of business activity of Canons customers caused by the worsening of the global
economy could adversely affect Canons results of operations. The cooperation and alliances with, and strategic investments in, third
parties undertaken by Canon may not produce successful results. Canon carries out many activities with other companies in the form of
alliances, joint ventures, and strategic investments. These activities are
important for Canons technological development process. However, weak business
trends or disappointing performance of partners may adversely affect the
success of these activities. In addition, the success of these activities may
be adversely affected by the inability of Canon and its partners to
successfully define and reach common objectives. Canon can be adversely affected by fluctuations in the stock and bond
markets. Canons assets include investments in publicly traded securities. As a
result, Canons results and general financial position may be affected by
fluctuations in the stock and bond markets. In addition, if valuations of
investment assets decrease due to conditions in, for example, stock or bond
markets, additional funding and accruals with respect to Canons pension and
other obligations may be required, and such funding and accruals may adversely
affect Canons consolidated financial condition and operating results. Canons operating and financing activities expose Canon to foreign
currency exchange and interest rate risks that may adversely affect its
revenues and profitability. Canon is exposed to the risks of foreign currency exchange rate
fluctuations. Canons consolidated financial statements, which are presented in
Japanese yen, are affected by foreign exchange rate fluctuations. These
fluctuations can affect the yen value of Canons equity investments denominated
in foreign currencies and monetary assets and liabilities arising from business
transactions in foreign currencies. They can also affect the costs and sales
proceeds of products that are denominated in foreign currencies. In addition,
as a result of translating foreign currency financial statements of Canons
foreign subsidiaries into Japanese yen, its reporting currency, assets and
liabilities, and revenues and expenses will fluctuate. Canon is also exposed to
risk of interest rate fluctuations, which may affect the value of Canons
financial assets and liabilities, in particular, long-term debt. Confidential information may be inadvertently disclosed which could lead
to damage claims or harm Canons reputation, and may have an adverse effect
upon Canon s business. In connection with certain projects, Canon may receive confidential or
sensitive information (such as personal information) from its customers
relating
to these customers or to other parties. Although Canon makes every effort to
keep this information confidential through company procedures designed to
prevent accidental release of confidential or sensitive information, such
information may be inadvertently disclosed without Canons knowledge. If this
occurs, Canon may be subject to claims for damages from parties affected,
suffer harm to its reputation or be subject to liabilities and/or penalties
under applicable statutes. In addition, inadvertent disclosure of secretive information regarding new
technology, as well as market and customer information, would have a material
adverse affect upon Canons business. Canon depends on efficient logistics services to distribute its products
worldwide. Canon depends on efficient logistics services to distribute its products
worldwide. If problems arise with Canons computerized logistics system, or
labor disputes, such as a dockworkers strike, occur, it could lead to a
disruption of Canons operations and result not only in increased logistical
costs, but also in a loss of sales opportunities due to delays in delivery. In
addition, because demand for Canons consumer products can fluctuate throughout
the year, the failure to adjust bookings for vessels and the preparation of
warehouse space accordingly could result in either the loss of sales
opportunities, or the increase of unnecessary costs. 8




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Item 4.   Information on the Company 
 A.   History and development of the Company Canon Inc. is a joint stock corporation (kabushiki kaisha) formed under
Japanese Commercial Code. Its principal place of business is at 30-2,
Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan. The telephone number is
+81-3-3758-2111. The Company was incorporated under the laws of Japan on August 10, 1937 to
produce and sell Japans first focal plane shutter 35mm still camera, which was
developed by its predecessor company, Precision Optical Research Laboratories,
which was organized in 1933. In the late 1950s, Canon entered the business machines field utilizing
technology obtained through the development of photographic and optical
products. With the successful introduction of electronic calculators in 1964,
Canon continued to expand its operations to include plain paper copying
machines, faxes, laser beam printers, bubble jet printers, computers, video
camcorders and digital cameras.  The following are important events in the development of Canons business
in recent years.  
    
    In 1999, Canon and Toshiba Corporation agreed to collaborate on
developing and establishing mass-production technologies for SEDs
(surface-conduction electron-emitter displays) with potential in
large-screen wall-mounted displays.
    
    In 1999, Oita Canon Materials Inc. was established in Oita, Japan as
an integrated production site for chemical products for business machines.
    
    In 1999, the Canon Inc. Ayase Office was established in Kanagawa,
Japan with the goal of reinforcing the R&D structure for
semiconductor-related devices.
    
    In 2000, the Canon Inc. Optics R&D Center, an R&D facility for
optical technology, was established in Tochigi, Japan.
    
    In 2000, Canon Inc. changed the listing of its American Depository
Receipts (ADRs) to the New York Stock Exchange (NYSE) from the Nasdaq
National Markets.
    
    In 2001, Canon Vietnam Co., Ltd. was established in Hanoi, Vietnam as
a production site for bubble jet printers.
    
    In 2001, Canon Zhongshan Business Machines Co., Ltd. was established
in Zhongshan, China as a production site for laser beam printers.
China.
    
    In 2001, Canon (Suzhou) Inc. was established in Suzhou, China as a
production site for digital copying machines and digital multifunction devices.
    
    In January 2003, Canon Aptex Inc. and Copyer Co., Ltd., two of Canon
Inc.s manufacturing subsidiaries in Japan, formally merged to become
Canon Finetech Inc. The merger was conducted with the aim of
concentrating and further strengthening the core competencies of the two
merged companies in office equipment-related technologies.
    
    In April 2003, Fukushima Canon Inc. was established as a wholly-owned
subsidiary through the spin-off of Fukushima Plant, with the aim of high
value-added manufacturing company equipped with product-launching
capability.
    
    In April 2003, Canon N.T.C.s marketing operations spun off and merged
with Canon System & Support Inc., and its real estate operations spun
off into Canon Facility Management, Inc. Following the corporate
spin-offs, Canon N.T.C.s operations will focus on development and
manufacturing On January 1, 2004, Canon Precision Inc. (Canon Precision), a
wholly-owned subsidiary of Canon Inc., merged with Hirosaki Precision, Inc.
(Hirosaki Precision), a wholly-owned subsidiary of Canon Precision. Hirosaki
Precision was merged into Canon Precision, the surviving company. Canon
Precision targets the improved efficiency and specialization of business
operations. Since both Canon Precision and Hirosaki Precision were consolidated
subsidiaries of Canon Inc., the merger has no impact on Canons current or
future business results. On January 1, 2004, Canon N.T.C., Inc. (Canon N.T.C.), a wholly-owned
subsidiary of Canon Inc., spun off its environmental business operations into a
newly established company, named Canon Ecology Industry Inc. Following the
separation, Canon N.T.C. focused its energies on its semiconductor
equipment-related business and was renamed Canon Semiconductor Equipment Inc.
The spin-off was intended to improve efficiency and the specialization of
business operations while facilitating the pursuit of independent businesses,
consistent with Canons Excellent Global Corporation Plan. In fiscal 2003, 2002 and 2001, Canons capital expenditures were Yen
210,038 million, Yen 198,702 million and Yen 207,674 million, respectively. In
2003, major capital expenditure were for investments in tools and dies, but
also included were investments for the relocation of the corporate headquarters
office of Canon Sales Co. Inc. and the facilities for production of the
semiconductor production equipment in Japan. For the fiscal 2004, Canon projects that its capital expenditures will
amount to approximately Yen 300,000 million. This amount is expected to be
spent on such expenditures for the establishment of new production engineering
base and new research and development base. Canon anticipates that funds needed
to fulfill these capital expenditures will be generated internally through
operations. 9




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B.   Business overview Canon is one of the worlds leading manufacturers of plain paper copying
machines, digital multifunction devices, or MFDs, laser beam
printers, inkjet printers, cameras and steppers. Canon sells its products principally under the Canon brand name and
through sales subsidiaries. Each of these subsidiaries is responsible for
marketing and distribution to retail dealers in an assigned territory.
Approximately 73% of consolidated net sales in fiscal 2003 were generated
outside Japan; approximately 33% in the Americas, 30% in Europe and 10% in
other areas including Asia. Canons strategy is to develop innovative, high value-added products which
incorporate advanced technologies. Canons research and development activities range from basic research to
product-oriented research directed at keeping and increasing the technological
leadership of Canons products in the market. Canon manufactures the majority of its products in Japan, but in an effort
to reduce currency exchange risks and production cost, Canon has increased
overseas production and the use of local parts. Canon has manufacturing
subsidiaries in the United States, Germany, France, Taiwan, China, Malaysia,
Thailand and Vietnam, and a manufacturing joint venture in Korea. As a concerned member of the world community, Canon emphasizes recycling,
and has increased its use of clean energy sources and cleaner manufacturing
processes. Canon has also adopted programs to collect and recycle used
cartridges and to refurbish used copy machines. In addition, Canon has
completely removed environmentally unfriendly chemicals from its manufacturing
processes. 
 Products Canons products are divided into the following three product groups:
business machines, cameras, and optical and other products. -Business machines- The business machines product group is divided into three sub-groups
consisting of office imaging products, computer peripherals and business
information systems. Office imaging products Canon manufactures, markets and services a wide range of office network
digital MFDs, color network digital MFDs, office copying machines,
personal-use copying machines and full-color copying machines. The office-use market is subject to rapid change, and in fiscal 2003,
customer preferences has shifted from copying machines to digital MFDs, as well
as from monochrome to color products. To respond to these trends, Canon has
been strengthening its lineup of digital MFDs in the imageRUNNER (iR) series,
which have versatile functions, such as copying, printing, scanning, faxing and
data-sharing functions on the Internet and intranets. Canon is also marketing
diverse expansion modules, software and business solutions to increase customer
value. For the development of MFDs, Canon makes effective use of wide range of
technologies from the fields of optics, mechatronics, electronic photo
processing, chemical materials and image processing. Canons MFDs are
differentiated chiefly by the use of leading-edge System On a Chip technology
in the imageRUNNER controller, which acts as the brains of networked MFDs.
The controller provides easy integration with customers IT environments
together with speedy, high-quality image processing. This boosts office
productivity, thereby garnering acclaim from business customers. Canon also
introduced new MFD models throughout fiscal 2003, including the Color
imageRUNNER C3200 (iR C3200), the first color offerings in the imageRUNNER
series, which achieved healthy sales. Canon has a powerful line of full-color copying machines and color digital
MFDs for users ranging from professional graphic designers to business offices.
The trend in printing industry is gradually moving away from large-lot printing
using expensive machinery to small-lot printing on demand and personalized
printing. Canons high-end MFDs and color digital MFDs can be applied to the
print on demand market. In addition, Canon aims to respond to the growing
demand for color imaging for business needs with products using its renowned S
Toner, featuring spherical particles and a microscopic wax-based structure, and
our oil-less fixing engine. Canon has dominant market share in monochrome copying machines for
personal use. Demand for analog products is continuing in Asia, Russia and
Eastern Europe. Canon also introduced digital products in the Americas and in
Europe in response to the shift in demand toward digital products. The office imaging products category also includes the related sales of
paper and chemicals, service charges and sales of replacement parts. Computer peripherals Computer peripherals include laser beam printers, inkjet printers and
scanners. Developed and fostered by Canon, laser beam printers are standard output
peripherals for offices. Canons laser beam printers are relatively small in
size and have high-quality printing capabilities attributable to Canons
expertise in laser beam printing and plain paper copying technologies. Canons
adoption of a user-replaceable toner cartridge system containing optical
components makes its laser beam printers easy to maintain. Most of Canon laser
beam printer sales are on an OEM basis. Canon also distributes Canon brand
laser beam printers in Japan, Europe and Oceania. 10




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As the inventor of bubble jet printing technology, Canon believes it
continues to provide customers with the best performance the technology has to
offer. Canon provides high-performance and high value added models both in
single-function printers and multi-function printers. In response to heated
competition in
the inkjet printer segment, Canon launched several new models in fiscal
2003. Particularly noteworthy were the bubble jet printers supporting the
PictBridge digital camera-printer communications standard, which were released
in the second half of the year. These new models incorporated New MicroFine
Droplet Technology, which has boosted image quality and print speed over those
offered on previous models. The keys to a successful printer are speed, image
quality and paper handling capabilities. Although ranked high among the leaders
in all three categories, Canon has targeted each category for improvements.
Additionally, the PictBridge system has been marked for enhancement, and future
printers will offer even stronger integration with digital cameras. Canon markets a wide variety of products for a spectrum of user needs,
including image scanners in CanoScan LiDE series using Contact Image Sensor,
scanners with charge-coupled devices for high resolution that can also scan
film in the CanoScan series, and film scanners that handle both 35 mm film and
advanced photo system cartridge. Canon has deployed its expertise to develop
space-saving, energy-efficient scanners, as well as easy PC connection via
universal serial bus interface. However, since peaking in 2000, the scanner
market has continued to shrink at a rate of 10% to 20% per year. Under the
prevailing highly competitive conditions, it is necessary for Canon to attain a
high market share. To achieve that goal, Canon has successfully introduced
several new scanner models. Business information systems Business information systems primarily consist of micrographic equipment,
personal computers, calculators, document scanners and work stations. With the movement toward digitalization, the need to scan documents into
text data or image data is expanding. Canons document scanners rapidly and
efficiently digitize large volumes of information on paper. Canon offers a wide
range of scanner models, including color capable compact sheet-fed types and a
flatbed model suitable for book-type documents. Canon also offers a hybrid
model that can create microfilm records while digitizing the information.
Canons diverse lineup seeks to meet increased demands for digitizing office
documents to share across Internet or intranet platforms or to capture data
from forms with optical character recognition. Canons calculator operations, from development to production and
marketing, are centered in Hong Kong. The Canon tradition of technological
innovation has been inherited by its personal information products, from
calculators with printers to electronic dictionaries. Canon continues to
develop distinct, appealing personal information products that reflect trends
and demand. The work stations and personal computers sold by Canon are manufactured by
third parties under the manufacturers own brand names. -Cameras- Canon manufactures and markets digital cameras and film cameras. Canon
also manufactures and markets digital video camcorders, lenses, and various
camera accessories. Digital cameras have become common tools to input images into PCs. In
addition to ensuring the best possible image quality throughout its product
lineup, Canon offers digital compact cameras that are easy to use and to carry.
In 2003, the compact digital camera market continued to show significant
growth. Canon introduced six new PowerShot series and three Digital ELPH series
cameras and has finally reached the top position in the industry, in unit sales
basis. Canons digital single-lens reflex cameras are designed to meet needs from
amateurs to professionals. These cameras incorporate innovative technologies
such as 45-point area auto-focus, eye-controlled auto-focus, depth-of-field
control, Base-stored Image Sensor (BASIS), Complementary Metal Oxide
Semiconductor (CMOS) imaging sensors, Digital Imaging Processor (DIGIC), and a
fully electronic mount system to transmit data between the lens and the camera
chassis. Particularly in the digital single-lens reflex camera segment, popular
new product offerings including the EOS 10D and EOS Digital Rebel (EOS 300D
Digital) bolstered Canons dominant position worldwide. Canons digital
single-lens reflex cameras feature the companys proprietary, CMOS imaging
sensors to offer advantages like low image noise, and low power consumption.
Both the sensor technology, and the cameras themselves, won numerous awards in
the respective industries. Canon also offers a comprehensive line-up of conventional film cameras to
satisfy the needs of users everywhere, from models with high-performance zoom
lenses to models with large enhanced viewfinders and full water resistance.
Hindered by the surging popularity of digital cameras, the continued shrinking
of the conventional film camera market has been a recent trend. Canons
introduction of new models in fiscal 2003, however, enabled it to retain its
position firmly atop this market worldwide and to record a healthy level of
profitability. With a cautious eye on market trends, Canon will continue to
develop new products and maintain a firm commitment to the film camera market. In the camera lens segment, technological developments, including
diffractive optical elements, image stabilizer and ultrasonic motor, have
helped Canon to maintain a technical lead over other makers. Canon offers over
50 lenses in the EF series. These high-quality, high-performance lenses provide
outstanding performance with digital cameras as well as silver-halide cameras,
greatly contributing to Canons sales.
Due to market expansion of digital single-lens reflex cameras, sales of middle
to high-class lenses have been increasing. The introduction of new lenses
offering optimum performance with Canons digital single-lens reflex cameras is
planned for 2004. Canon also provides full line-up video camcorders from versatile, compact
and stylish models to its flagship models for professionals. Canons video
camcorders incorporate the same optical technologies and digital signal
processing technology as its world-renowned cameras, and come equipped with
optical
image stabilizers and its one-chip video integrated circuit
signal-processing system large scale integration to ensure high image quality.
Canons video camcorders are favored by many users for its optical image
stabilizer, and red-green-blue primary color filters. The adoption of megapixel
charge coupled devices, secure digital memory cards and universal serial bus
connectivity offers a wealth of possibilities for the creation and management
of still images, as well as video. In addition, together with DV Messenger
software, Canon video camcorders can be used to communicate via the Internet
with real-time sound and images. the worldwide digital video camcorder market,
Canons eight new products have increased its share in the market. According to
GfK Marketing Services Japan Ltd., a market research company, Canons Optura
300 (MVX 10i) maintained the leading position in terms of units of sales in the
Japanese market for the three months from October through December of fiscal
2003. The Optura was rated highly for its advanced DIGIC DV digital imaging
processor, which improves both digital movie quality and digital still quality. 11




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Since Canon introduced the new PictBridge-equipped CP series compact photo
printers in fiscal 2003, the market has shown very positive signs of accepting
this distinctive new printer category. Canons CP series of dye-sublimation
photo printers allows users to print digital photos without having to use a PC,
thereby creating a new photo-processing culture for digital camera users. In
fiscal 2004, Canon aims to show strong leadership and presence in this new
printer market. -Optical and other products - Canons optical and other products includes semiconductor production
equipment, broadcasting lenses, medical equipment and electronic components. Semiconductor production equipment includes steppers and mask aligners.
Steppers are used to expose circuits on silicon substrates. Canon has
commercialized a Krypton Fluoride excimer-laser steppers and an Argon Fluoride
excimer-laser scanning steppers. At the top of its class, the new Argon
Fluoride excimer-laser scanning stepper makes possible top-level throughput
rates of over 140 wph (wafers per hour) for 300 mm wafers. Canon announced in
Japan in July, 2003 that it had begun accepting purchase orders for its latest
300 mm-compatible lithography toolthe Canon FPA-6000ES6a Krypton Fluoride
scanning stepper enabling volume production at the 100 nm process node. Mask aligners are used to produce liquid crystal displays, or LCDs, and
Canons model for large-sized LCD substrates are sold particularly well in line
with increased demand for large flat panels for PC display and LCD televisions.
Canon, together with nine other Japanese semiconductor-industry companies, have
formed the Extreme Ultraviolet Lithography System Development Association. The
consortium aims to develop key technology for next-generation lithography. Canon is the world leader in television broadcasting lenses, which are
used to capture images from sports and news events, concerts and studio
broadcasts. Medical equipment sold by Canon includes X-ray cameras, retinal cameras,
autofractmeters and image-processing equipments for computerized diagnostic
systems. Canons pioneering digital radiography system takes X-ray photography
and medical diagnosis into the digital age. Other products sold by Canon include electronic components, such as
magnetic heads for audio and video tape recorders and micro-motors for printers
and other components, which are sold primarily to equipment manufacturers.
Canon has also been developing a cost efficient solar-power system that
incorporates amorphous silicon technology which is used in Canons high-end
monochrome copying machines. 
 Marketing and distribution Canon sells its products primarily through subsidiaries with
responsibility for specific geographic areas. Each subsidiary is responsible
for its own market research and for determining its sales channels, advertising
and promotional activities. In Japan, Canon sells its products primarily through Canon Sales Co.,
Inc., mainly to dealers and retail outlets. In the Americas, Canon sells its products primarily through Canon U.S.A.,
Inc., Canon Canada, Inc. and Canon Latin America, Inc., mainly to dealers and
retail outlets. In Europe, Canon sells its products primarily through Canon Europa N.V.,
which sells primarily through subsidiaries or independent distributors to
dealers and retail outlets in each locality. In addition, copying machines are
sold directly to end-users by Canon (U.K.) Ltd. in the United Kingdom, and by
Canon France S.A. in France. In Southeast Asia and Oceania, Canon sells its products through
subsidiaries located in those areas. In addition, copying machines are sold
directly to end-users by Canon Australia Pty. Ltd. in Australia. Canon also sells laser beam printers on an OEM basis to Hewlett-Packard
Company. Hewlett-Packard Company resells these printers under the HP LaserJet
Printers name. During fiscal 2003, such sales constituted approximately 20% of
Canons consolidated net sales, as compared to 21% in the previous fiscal year. 
 Service In Japan and overseas, product service is provided in part by independent
retail outlets and designated service centers that receive technical training
assistance from Canon. Canon also services its products directly. Most of Canons business machines carry warranties of varying terms
depending upon the model and the country of sale. Cameras and camera
accessories carry a one-year warranty based on normal use. Canon services its copying machines and supplies replacement drums, parts,
toner and paper. In Japan, most customers enter into a maintenance service
contract under which Canon provides maintenance services, replacement drums and
parts in return for a per-copy charge. Copying machines which are not covered
by a service contract may be serviced from time to time by Canon or local
dealers for a fee. 12




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##### Table of Contents



NET SALES BY PRODUCT GROUP Years ended December 312003
    
    change
    
    2002
    
    change
    
    2001(Millions of yen except percentage data)Bussiness machines:Office imaging products
    
    Yen
    1,061,099
    
    
    
    +3.7
    %
    
    
    1,023,131
    
    
    
    +4.4
    %
    
    
    980,053Computer peripherals
    
    
    1,089,312
    
    
    
    +3.2
    
    
    
    1,055,956
    
    
    
    +0.8
    
    
    
    1,047,385Bussiness information products
    
    
    123,493
    
    
    
    -16.1
    
    
    
    147,108
    
    
    
    -25.0
    
    
    
    196,0512,273,904
    
    
    
    +2.1
    
    
    
    2,226,195
    
    
    
    +0.1
    
    
    
    2,223,489Cameras
    
    
    653,540
    
    
    
    +34.5
    
    
    
    485,778
    
    
    
    +27.4
    
    
    
    381,367Optical and other products
    
    
    270,628
    
    
    
    +18.6
    
    
    
    228,155
    
    
    
    -24.6
    
    
    
    302,717Total
    
    Yen
    3,198,072
    
    
    
    +8.8
    
    
    
    2,940,128
    
    
    
    +1.1
    
    
    
    2,907,573
 NET SALES BY GEOGRAPHIC AREA Years ended December 312003
    
    change
    
    2002
    
    change
    
    2001(Millions of yen except percentage data)JapanUnaffiliated customers
    
    Yen
    856,851
    
    
    
    +8.6
    %
    
    
    789,066
    
    
    
    -8.1
    %
    
    
    858,580Intersegment
    
    
    1,662,172
    
    
    
    +12.7
    
    
    
    1,475,091
    
    
    
    +7.0
    
    
    
    1,378,031Total
    
    
    2,519,023
    
    
    
    +11.3
    
    
    
    2,264,157
    
    
    
    +1.2
    
    
    
    2,236,611AmericasUnaffiliated customers
    
    Yen
    1,044,998
    
    
    
    +3.7
    %
    
    
    1,007,572
    
    
    
    +2.4
    %
    
    
    983,561Intersegment
    
    
    8,101
    
    
    
    -17.3
    
    
    
    9,791
    
    
    
    -44.0
    
    
    
    17,475Total
    
    
    1,053,099
    
    
    
    +3.5
    
    
    
    1,017,363
    
    
    
    +1.6
    
    
    
    1,001,036EuropeUnaffiliated customers
    
    Yen
    968,938
    
    
    
    +13.6
    %
    
    
    852,931
    
    
    
    +5.9
    %
    
    
    805,243Intersegment
    
    
    3,861
    
    
    
    -16.8
    
    
    
    4,639
    
    
    
    +89.4
    
    
    
    2,449Total
    
    
    972,799
    
    
    
    +13.4
    
    
    
    857,570
    
    
    
    +6.2
    
    
    
    807,692OthersUnaffiliated customers
    
    Yen
    327,285
    
    
    
    +12.6
    %
    
    
    290,559
    
    
    
    +11.7
    %
    
    
    260,189Intersegment
    
    
    503,119
    
    
    
    +17.9
    
    
    
    426,914
    
    
    
    +42.6
    
    
    
    299,410Total
    
    
    830,404
    
    
    
    +15.7
    
    
    
    717,473
    
    
    
    +28.2
    
    
    
    559,599EliminationsUnaffiliated customers
    
    Yen
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    Intersegment
    
    
    (2,177,253
    )
    
    
    
    
    
    
    (1,916,435
    )
    
    
    
    
    
    
    (1,697,365
    )Total
    
    
    (2,177,253
    )
    
    
    
    
    
    
    (1,916,435
    )
    
    
    
    
    
    
    (1,697,365
    )ConsolidatedUnaffiliated customers
    
    Yen
    3,198,072
    
    
    
    +8.8
    %
    
    
    2,940,128
    
    
    
    +1.1
    %
    
    
    2,907,573Intersegment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,198,072
    
    
    
    +8.8
    
    
    
    2,940,128
    
    
    
    +1.1
    
    
    
    2,907,573
 Note: Net sales geographic area is determined by the location of the Canon
entity originating the sale. Total operating profit by category is discussed in Item 5A Operating Results. 
 Seasonality Canons sales for the 4th quarter period are usually higher than those in
the other three quarters, mainly owing to strong demand for consumer products,
such as cameras and bubble jet printers, during the year-end holiday. In Japan,
corporate demand for office products peaks in the 1st quarter, as many Japanese
companies close their books in March. Sales also tend to increase at the start
of the new school year in each of the respective regions. 
 Sources of supply Canon purchases a variety of parts and raw materials, such as glass,
aluminum, plastic, steel and chemicals for use in product manufacturing. All
finished and semi-finished products purchased from outside sources are produced
in accordance with Canons designs and specifications. Canon purchases parts
and raw materials worldwide for its global production activities. Canon
assesses and selects suppliers based on a number of criteria, including
environmental friendliness, quality, cost, stability of supply and financial
condition. In addition, there has been a recent increase in prices of parts for
optical products, due in part to the limited number of suppliers of glass
materials and light source lasers. However, Canon has not experienced any
difficulty obtaining parts or raw materials and believes that it will be able
to continue to obtain the same in sufficient quantities to meet its needs. 13




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Canon also places significant emphasis on in-house development of
production tools. Canon recently purchased a mold-production company, adding to
its ability to produce many of the metal molds needed for production. Canon
also produces many of the tuning and measuring tools needed for the
development, maintenance and repair of its production equipment. Key tools such
as these are not marketed for sale; they are reserved for use within the Canon
Group. Canons ability to develop its own production tools helps establish
quality control and allows for speed and flexibility when retooling is
necessary  a crucial advantage in its cell production processes. Cell
production is the production system in which the entire production process is
undertaken by small groups of employees. In-house tool development may also
help cut costs over time and prevent the leakage of Canons core proprietary
technologies. 
 Competition Canon encounters intense competition in all areas of its business activity
throughout the world. Canons competitors range from some of the worlds major
multinational corporations to smaller, highly specialized companies. Canon
competes in a number of different business areas, whereas many of its
competitors are relatively more focused on one or more individual industries.
Consequently, Canon may face significant competition from entities that apply
greater financial, technological, sales and marketing or other resources than
Canon to their activities in a particular market segment. The principal elements of competition which Canon faces in each of its
markets are technology, quality, reliability, performance, price and customer
service and support. Canon believes that much of its ability to compete
effectively depends on conducting successful research and development
activities that enable it to create new or improved products and release them
on a timely basis and at commercially attractive prices. The competitive environments in which each product group operates are
described below:    Business machines The markets for office imaging products, computer peripherals and business
information products are highly competitive. Canons primary competitors in
these markets are Xerox Corporation, Hewlett-Packard Company, Lexmark
International Group Inc., Ricoh Company, Ltd., and Epson Corporation. Canon
believes that it is one of the leading global manufacturers of digital MFDs,
laser beam printers, bubble jet printers, image scanners and facsimile
machines. In addition to the general elements of competition described above,
Canons ability to compete successfully in these markets also depends
significantly on whether it can provide effective, broad-based business
solutions to its customers that solve multiple interrelated client needs. In
particular, the ability to provide equipment and software that connect
effectively to computer networks (ranging in scope from local area networks to
the Internet) is often a key to Canons competitive strength in these markets.
In China, whose markets are expected to expand since its joining of the World
Trade Organization, the current market leaders are Toshiba Tec Corporation,
Sharp Corporation and Konica Minolta Holdings, Inc. However, Canon is striving
to become one of the leading players in China. Canon believes that the
introduction of new digital technologies and value-added solutions will help
steer Canons business successfully through fast-moving markets such as China.    Cameras Competition in the camera industry is intense, with many established
market participants offering similar products. Canons primary competitors in
digital cameras are Sony Corporation, Fuji Photo Film Co., Ltd., Olympus
Optical Co., Ltd., Nikon Corporation, Casio Computer Co., Ltd. and Eastman
Kodak Company. Currently, Canon shares the top position with Sony Corporation
in unit sales of compact digital cameras, while Canon is the current leader in
the digital single-lens reflex camera segment. Canons primary competitors in
conventional film cameras are Nikon Corporation, Konica Minolta Holdings, Inc.,
Pentax Corporation, Olympus Optical Co., Ltd., and Fuji Photo Film Co., Ltd.
Hindered by the surging popularity of digital cameras, the conventional film
camera market continued to shrink in fiscal 2003. The introduction of new
models, however, enabled Canon to retain its position firmly atop this market
worldwide. Canons primary competitors in digital video camcorders are Sony
Corporation, Victor Company of Japan Ltd. and Matsushita Electric Industrial
Co., Ltd. In fiscal 2003, Canon expanded greatly its overall market share in
digital video camcorders, especially in the United States. Canon believes that
developing cameras with increasingly high resolution and faster image
processing are critical to its ability to remain competitive in the
fast-growing digital camera market segment.    Steppers and Aligners The market for steppers and aligners, used in the manufacture of
semiconductor devices and LCDs, is highly competitive. The market is
characterized by a relatively small number of dominant suppliers, since the
development of steppers and aligners requires extremely precise design and
manufacturing techniques and, as a result, very high levels of capital
investment. Canons primary competitors in the market for steppers and aligners are
Nikon Corporation and ASML Holding N.V., or ASML. Nikon Corporation has a
reputation for its excellent technology, especially optical lenses, and Intel
Corporation, the worlds leading semiconductor manufacturer, is one of their
major customers. ASML has in recent years improved its competitive position by
taking advantage of government subsidies and by focusing on the rapidly growing
foundry manufacturer industry. In fiscal 2002, ASML further increased its
competitive position by acquiring SVG Lithography Systems Inc. As a result of
the acquisition, ASML is now one of the largest semiconductor manufacturing
equipment companies in Europe. Because of the substantial capital expenditures required to install and
integrate equipment into a semiconductor production line, semiconductor
manufacturers tend to purchase their stepper and aligner production equipment
from the vendor that originally supplied the chip fabrication equipment. Canon
competes principally on its ability to meet and exceed product specifications,
including resolution and throughput, quality, reliability and system
maintenance cost. Because of the very rapid pace of technological innovation in
the semiconductor industry, Canon also believes that its ability to provide new
products on a timely basis is also a key competitive consideration for
customers seeking to integrate stepper and aligner production systems into the
planning and design of their new facilities. 14




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Patents and licenses Canon holds a large number of patents (including utility model rights),
design rights and trademarks in Japan and abroad to protect its research and
development and utilizes these intellectual property rights as important
strategic management tools. For instance, Canon has obtained and maintains its
intellectual property rights such as patents in its products business
operations, and forms alliances and technological exchanges with other
companies. According to the Statistical Report issued annually by the United States
Patent and Trademark Office, Canon has been consistently ranked as second or
third in recent years in terms of the number of patents issued in the United
States. Canon has granted licenses with respect to its patents to various Japanese
and foreign companies, particularly in areas such as electrophotography, laser
beam printers, multifunction printers and facsimiles. Some examples include: Oki Electric Industry Co., Ltd.
    
    (LED printers)Konica Corporation
    
    (electrophotography)Matsushita Electric Industrial Co., Ltd.
    
    (electrophotography)Sharp Corporation
    
    (facsimiles)Toshiba Corporation
    
    (business machines)Ricoh Company, Ltd.
    
    (electrophotography)Sanyo Electric Co., Ltd.
    
    (electronic still camera)Samsung Electronics Co., Ltd.
    
    (laser beam printers, multifunction printers and facsimiles)Brother Industries, Ltd.
    
    (electrophotography and facsimiles)Kyocera Mita Corporation
    
    (electrophotography)
 Canon has also been granted licenses with respect to patents held by other
companies. Some examples include: Jerome H. Lemelson Patent Incentives, Inc.
    
    (computer systems, image recording, communication devices)Energy Conversion Devices, Inc.
    
    (solar battery)Honeywell Inc.
    
    (camera and video products)Gilbert P. Hyatt U.S. Philips Corporation
    
    (microcomputer)SI Diamond Technology Inc.
    
    (display technology)
 Canon has also entered into cross-licensing agreements with other major
industry participants. Some examples include: International Business Machines Corporation
    
    (information handling systems)Hewlett-Packard Company
    
    (Bubble Jet printers)Xerox Corporation
    
    (business machines)Matsushita Electric Industrial Co., Ltd.
    
    (video tape recorders and video cameras)Eastman Kodak Co.
    
    (electro-photography and image processing technology)Ricoh Company, Ltd.
    
    (electrophotography products, facsimiles, and word processors)
 Canon has placed high priority on the management of its intellectual
property as part of its management strategies to enhance its global business
operations. Some products which are material to Canons operating results,
incorporate patented technology which is critical to the continued success of
these products. Typically, these products incorporate technology reflected in
dozens of different patents. Canon does not believe that its business, as a
whole, is dependent on, or that its profitability would be materially affected
by the revocation, termination, expiration or infringement upon, any particular
patent, copyright, license or intellectual property rights or group thereof. 
 Environmental regulations Canon is subject to a wide variety of laws and regulations as well as
industry standards relating to energy and resource conservation, recycling,
global warming, pollution prevention, pollution remediation, and environmental
health and safety. Some of the environmental laws which affect Canons
businesses are summarized below. 1.   European Union Directive on the Restriction of the Use of Certain
Hazardous Substances in Electrical and Electronic Equipment , or RoHS
Directive, and Directive on Waste Electrical and Electronic Equipment, or
WEEE Directive. These directives were adopted by the European Parliament in December 2002.
Member states are required to bring into force the laws necessary to comply
with these directives by August 13, 2004. Commencing July 1, 2006, companies
must ensure that their electrical and electronic equipment sold in the European
Union does not contain lead, cadmium, hexavalent chromium, mercury,
polybrominated biphenyls or polybrominated diphenyl ethers if placed on the
market after that date. Pursuant to the RoHS Directive, Canon will be required
to adapt its products so that they do not contain the prohibited hazardous
substances. The WEEE Directive requires that by August 13, 2005, companies that sell
electrical and electronic equipment bearing their trade names in the European
Union must arrange and pay for the collection, treatment, recycling, recovery
and disposal of their equipment and achieve designated recycling rates by
December 31, 2006. Pursuant to the WEEE Directive, Canon will be required to
establish collection and recycling systems for waste electrical and electronic
equipment and achieve the recycling ratio of waste electrical and electronic
equipment by the designated dates. The increased cost associated with the WEEE
directive may adversely affect Canons results of operations. 15




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2.   Superfund of the United States. Under the Comprehensive Environmental Response, Compensation and Liability
Act, or CERCLA, and the Resource Conservation and Recovery Act (collectively
known as Superfund) and related state laws, certain persons may be liable for
the release or threatened release of hazardous substances, including petroleum
and its derivatives, into the environment. These persons include the current
owner or operator of property where the release or threatened release occurred,
any persons who owned or operated the property when the release occurred, and
any persons who arranged for the disposal of hazardous substances at the
property. Liability under CERCLA is strict, retroactive, and in most cases
involving the state government as plaintiff, is joint and several, so that any
responsible party may be liable for the entire cost of investigating and
remediating the release of hazardous substances. As a practical matter,
however, liability at most CERCLA and similar sites is shared among all
solvent, potentially responsible parties. The liability of a party is
determined by the cost of investigation and remediation, the portion of the
hazardous substance(s) the party contributed to the site, and the number of
solvent, potentially responsible parties. Canon has identified a potential remediation site in connection with one
of its former manufacturing sites. See Risk FactorsRisks Related to Canons
Business Environmental clean-up and remediation costs relating to Canons
properties and associated litigation could decrease Canons net cash flow,
adversely affect its results of operations and impair its financial condition. 3.   Soil Pollution Prevention Law of Japan The Soil Pollution Prevention Law of Japan went into effect in February
2003. The law requires an owner of land to have the soil investigated by a
designated organization for the purpose of measuring the level of soil
pollution when the land is to be transferred or to be used for another purpose.
The results of such investigation are reported to the prefectural governor. If
the soil pollution is not within standards specified in the law, the governor
will designate the land as a designated area, publicly announce such
designation and make available upon request the investigation report. The
substances designated in the law consist of 25 chemical groups, including
substances such as lead, arsenic, and trichloro ethylene. If there is a
possibility that the soil pollution of the designated area may affect human
health, the governor will issue an order to the land owner to take remedial
actions. In response to the law, Canon has commenced a detailed survey and
measurement of soil and groundwater to determine the existence of pollution at
all of Canon Groups operational sites in Japan. The survey and measurement
will entail considerable cost. Additional costs may arise as remedial measures
become necessary. These factors may adversely affect Canons results of
operations and financial conditions. 4.   Law for Promotion of Effective Utilization of Resources of Japan The Law for Promotion of Effective Utilization of Resources of Japan, or
the Resources Law, was enacted in April 2001. The Resources Law requires
specified recycling industries, including the copying machine industry, to
enact measures designed to promote waste reduction, reuse and recycling of raw
materials. These requirements will increase Canons costs and may have an
adverse affect on its results of operations and financial conditions. 5.   Law on Promoting Green Purchasing of Japan The Law on Promoting Green Purchasing of Japan took effect in April 2001.
The law encourages both national and local governments to procure products with
low environmental burdens. Businesses are required to provide information that
is necessary to determine the environmental impact of products that they
manufacture. In response to the law, Canon expects in the future to:  
    
    manufacture products that consume less electricity to prevent global warming and to conserve energy,
    
    use recycled parts and recycled materials,
    
    reduce the types of raw materials used in order to conserve resources,
    
    accelerate the date by which the requirements of the law are implemented to promote the elimination of hazardous substances. The law also requires Canon to collect its used products and recycle them,
establish alternative technologies for hazardous substances used in products
and standardize the substances used in its products. These measures will entail
additional costs and may adversely affect its results of operations and
financial conditions. 6.   California Electronic Waste Recycling Act of 2003 Enacted in September 2003, the California Electronic Waste Recycling Act
seeks to create a system for the collection and recycling of electronic
products. The Act makes it unlawful to sell, on and after July 1, 2004, a
covered electronic device in California to a consumer unless the California
Integrated Waste Management Board or the California Environmental Protection
Agencys Department of Toxic Substances Control determines that the
manufacturer of that device is in compliance with the Act. Electronic devices
covered include cathode ray tubes, cathode ray tube devices, flat panel
screens, or any other similar video display device with a screen size greater
than four inches measured diagonally, if the Department of Toxic Substances
Control determines that they are hazardous when discarded or disposed. The Act
prohibits the sale of a covered electronic device, after January 1, 2005, that
is not labeled, as specified in the Act. Under the Act, retailers selling a
covered electronic device in California must collect an electronic waste
recycling fee from the consumer on and after July 1, 2004, and to transmit the
fee to the California Integrated Waste Management Board. A manufacturer that
sells covered electronic devices in California must, by July 1, 2005, and at
least once annually thereafter, submit a report to the California Integrated
Waste Management Board on the number of covered electronic devices it sold in
California during the previous calendar year and other information regarding
certain specified materials in those devices. This other information includes
estimated amounts of use and reduction in the use from the previous year of six
hazardous substances (lead, cadmium, hexavalent chromium, mercury,
polybrominated biphenyls or polybrominated diphenyl ethers), as well as
estimated amounts of recycled materials contained in covered devices.
Manufacturers are also required to make information available to consumers
describing where and how to return, recycle and dispose of a covered electronic
device. The scope of the covered devices is yet unclear, and Canon will incur
costs once the Department of Toxic Substances Control determines which of its
products are covered by the Act. 16




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##### Table of Contents



7.   Draft European Union Directive on Batteries and Accumulators and Spent
Batteries and Accumulators On November 21, 2003, the European Commission proposed a draft Directive
on Batteries and Accumulators and Spent Batteries and Accumulators to replace a
similar existing directive. Whereas the existing directive applies only to
batteries with a certain mercury, cadmium and lead content, the new directive
applies to all batteries and accumulators placed on the European Community
market. When enacted, the new directive will require specified labels on all
batteries. In addition, the directive establishes specific targets for
collection, treatment and recycling of batteries and accumulators. Canon
expects that compliance with the directive will increase its financial costs
such as recycling fees and guarantees of products placed on the market. 8.   Clean Production Promotion Law of China The Clean Production Promotion Law of China, effective as of January 1,
2003, provides, among other things, for environmentally conscious design,
elimination of hazardous substances, ease of disassembly, material
identification, collection and recycling. The Chinese government is expected to
publish a list of products to be collected, but it is yet unclear what action
Canon needs to take at the present time. 9.   Draft Management Methods for the Prevention and Control of Pollution from
the Production of Electronic Information Products of China Modeled on the European Union RoHS Directive described above, the Chinese
Ministry of Information Industry and State Environmental Protection
Administration are drafting a proposal  Management Methods for the Prevention
and Control of Pollution from the Production of Electronic Information Products
- that regulates the content of electronic information products. This draft
law, the latest version of which was issued in August 2003, would prohibit
certain substances from being included in electronic products that are
manufactured or sold in China. In addition to the six substances prohibited by
the EU RoHS Directive, the draft Chinese law would also prohibit other
hazardous substances, although it is unclear what substances are covered by
this phrase. The proposed law requires producers to label goods that contain
harmful materials and designate them as fully-recyclable, partially-recyclable,
or non-recyclable. Producers would also be required to assume costs of recovery
of discarded equipment. The August 2003 draft does not indicate when the law
might become effective, although a previous draft proposed an effective date of
January 1, 2006.  New environmental legislation and regulations such as the RoHS Directive
in Europe and similar legislation and regulation in other countries will have
an impact on Canons production methods. Lead-free solder, for example, which
is to replace traditional toxic lead solder, demands different and more complex
manufacturing processes due to its higher melting point. Although the details
of the RoHS Directive are yet unclear, Canon has proceeded to develop a
green, toxic-free procurement policy with other industry leaders. In addition, Canon has long been an industry leader in the recycling of
laser inkjet cartridges and other consumable items, as well as in the actual
materials used for the production and packaging of its products. In 1990, Canon
pioneered the collecting and recycling of used toner cartridges, and has to
date recycled over 120,000 tons of those cartridges. Today, the toner
cartridges Canon collects are 100% recycled in four facilities worldwide. 
 C.Organizational structure Canon Inc. and its subsidiaries and affiliates form a group of which Canon
Inc. is the parent company. As of December 31,2003, Canon had 198 consolidated
subsidiaries and 19 affiliated companies accounted for by the equity method. The following table lists the significant subsidiaries owned by Canon
Inc., all of which are consolidated, as of December 31, 2003. Proportion of
    
    Proportion ofownership interest
    
    voting powerName of company
    
    Head office location
    
    owned
    
    heldCanon Sales Co., Inc.
    
    Tokyo, Japan
    
    
    50.3
    %
    
    
    51.1
    %Canon U.S.A., Inc.
    
    New York, U.S.A.
    
    
    100.0
    %
    
    
    100.0
    %Canon Europa N.V.
    
    Amstelveen, The Netherlands
    
    
    100.0
    %
    
    
    100.0
    %
 17




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##### Table of Contents



D. Property, plants and equipment Canons manufacturing is conducted primarily at 18 plants in Japan and 14
plants in other countries. Canon owns all of the buildings and the land on
which its plants are located, with the exception of certain leases of land and
floor space of certain of its subsidiaries. The names and locations of Canons
plants
and other facilities, their approximate floor space and the principal
activities and products manufactured therein as at December 31, 2003 are as
follows: Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedDomestic
    
    (Thousands ofsquare feet)Shimomaruko Headquarters, Tokyo
(Corporate Headquarters)
    
    
    2,473
    
    
    Develop business machines and cameras;
prosecute patents; conduct purchasing,
quality assurance, research, and planning for
production engineering and technologyKosugi Office, Kanagawa
    
    
    398
    
    
    Conduct R&D in software and systemsFuji-Susono Research Park,
Shizuoka
    
    
    1,014
    
    
    Conduct R&D in electro-photographic
technologiesCanon Research Center,
Kanagawa
    
    
    137
    
    
    Conduct R&D of basic and advanced technologies for future
businessesHiratsuka Development Center,
    
    
    460
    
    
    Conduct R&D in electronic devices and displayAyase Office, Kanagawa
    
    
    315
    
    
    Conduct R&D in semiconductor devicesEcology Research & Development
Center, Kyoto
    
    
    92
    
    
    Conduct R&D in environmental technologiesOptics R&D Center, Tochigi
    
    
    187
    
    
    Conduct R&D in optics technologiesTamagawa Plant, Kanagawa
    
    
    434
    
    
    Development of inkjet printers and inkjet chemicalsUtsunomiya Plant,
Tochigi
    
    
    586
    
    
    Produce camera lenses, video camcorder lenses,
broadcasting lenses and other specialized
optical lensesToride Plant,
Ibaraki
    
    
    2,406
    
    
    Conduct R&D in electro-photographic
technologies, mass-production trials and
support, and produce copying machines and
laser beam printer consumablesAmi Plant,
Ibaraki
    
    
    1,258
    
    
    Produce business machines, tools, production
equipment and optical productsUtsunomiya Optical Products
Operations, Tochigi
    
    
    1,005
    
    
    R&D, manufacturing, sales, servicing of steppers;
R&D, sales of optical broadcasting equipment;
R&D, sales, servicing of medical equipmentKamisato Office, Saitama
    
    
    62
    
    
    Produce medical equipment
 18




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##### Table of Contents



Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedDomestic
    
    (Thousands ofsquare feet)Canon Electronics Inc. Plants,
Saitama and Gunma
    
    
    1,070
    
    
    Produce laser beam printers, laser beam printer
units, magnetic components and micrographicsCanon Finetech Inc, Plants,
Ibaraki, Tokyo, Yamanashi, and Fukui
    
    
    1,405
    
    
    Produce copying machines, copying machine
consumables, copying machine parts, copying
machine accessories, inkjet color card and
label printersCanon Precision Inc. Plants,
Tokyo and Aomori
    
    
    654
    
    
    Produce micro-motors, precision parts and
laser beam printer consumablesOptron Inc. Plant,
Ibaraki
    
    
    136
    
    
    Produce optical crystals and vapor
deposition materialsCanon Chemicals Inc. Plants,
Ibaraki
    
    
    1,390
    
    
    Produce copying machine and laser beam
printer consumablesCanon Components Inc. Plant,
Saitama
    
    
    357
    
    
    Produce contact image sensors and inkjet
printer consumablesOita Canon Inc. Plant,
Oita
    
    
    320
    
    
    Produce 35mm and advanced photo system cameras, digital video
camcorders and digital camerasNagahama Canon Inc. Plant,
Shiga
    
    
    1,021
    
    
    Produce laser beam printers, laser beam
printer consumables, inkjet printer consumablesOita Canon Materials Inc. Plant, Oita
    
    
    1,190
    
    
    Produce copying machine and laser beam printer consumablesUeno Canon Materials Inc. Plant,
Mie
    
    
    559
    
    
    Produce copying machine and laser beam
printer consumablesFukushima Canon Inc.Plant, Fukushima
    
    
    649
    
    
    Produce inkjet chemicalsCanon N.T.C., Inc. Plants,
Ibaraki and Saitama
    
    
    1,322
    
    
    Produce parts for business machinesNisca Corporation Plant,
Yamanashi
    
    
    676
    
    
    Produce copying machine parts and
accessories
 19




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##### Table of Contents



Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedOverseas
    
    (Thousands ofsquare feet)[Europe]Canon Giessen GmbH Plant,
Giessen, Germany
    
    
    359
    
    
    Produce copying machines and copying machine
consumablesCanon Bretagne S.A.S. Plant,
Liffre, France
    
    
    506
    
    
    Produce copying machines, copying machine
consumables and laser beam printers[America]Canon Virginia, Inc. Plants,
Virginia, U.S.
    
    
    1,010
    
    
    Produce laser beam printers and laser beam
printer consumables; refurbish copying machines[Asia]Canon Inc., Taiwan Plant,
Taiwan
    
    
    432
    
    
    Development and manufacture 35mm single-lens reflex
cameras and leaf shutter cameras;
manufacture advanced photo system camerasCanon Opto (Malaysia)Sdn. Bhd. Plant,
Selangor, Malaysia
    
    
    551
    
    
    Produce leaf shutters, advanced photo system cameras, digital
cameras, video camcorder and camera lensesCanon Dalian Business Machines, Inc.
Plant, Dalian China
    
    
    1,213
    
    
    Produce laser beam printers and laser beam
printer consumablesCannon Zhuhai, Inc. Plant,
Zhuhai, China
    
    
    669
    
    
    Produce leaf shutter cameras, laser beam
printers, facsimile machines and scannerTianjin Canon Co., Ltd. Plant,
Tianjin, China
    
    
    154
    
    
    Produce copying machinesGuang-Dong United Optical Instrument
Co., Ltd. Plant, Guang Dong, China
    
    
    14
    
    
    Produce leaf shutter camerasCanon Hi-Tech (Thailand) Ltd. Plant,
Ayutthaya, Thailand
    
    
    1,043
    
    
    Produce copying machines, inkjet printers
and facsimile machinesCanon Engineering (Thailand) Ltd. Plant,
Ayutthaya, Thailand
    
    
    128
    
    
    Produce business machines part molds and diesCanon Zhougshan Business Machines
Co., Ltd. Plant, Zhougshan, China
    
    
    470
    
    
    Produce laser beam printersCanon Vietnam Co., Ltd. Plant,
Hanoi, Vietnam
    
    
    275
    
    
    Produce inkjet printersCanon Suzhou Inc. Plant,
Suzhou, China
    
    
    921
    
    
    Produce copying machines
 Canon considers its manufacturing and other facilities to be well
maintained and believes that its plant capacity is adequate for its current
requirements.
At December 31, 2003, book value Yen 11,358 million of land, buildings and
related equipment were subject to mortgages securing Yen 4,955 million of
Canons indebtedness. 20




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##### Table of Contents



Item 5.  Operating and Financial Review and Prospects 
 A. Operating Results The following discussion and analysis provides information that management
believes to be relevant to understanding Canons consolidated financial
condition and result of operations. 
 Overview Canon is one of the worlds leading manufacturers of copying machines, laser
beam printers, inkjet printers, cameras, steppers and aligners. Canon earns
revenues primarily from the manufacture and sale of these products domestically
and internationally. Canons basic management policy is to contribute to the
prosperity and well-being of the world while endeavoring to become a truly
excellent global corporate group targeting continued growth and development. Canon divides its businesses into three product groups: business machines,
cameras and optical and other products. The business machines product group has
three sub-groups: office imaging products, computer peripherals and business
information products. Economic environment Looking back at the global economy in 2003, although economic conditions in the
United States remained stagnant during the first half of the year, a recovery
quickly took hold from the third quarter, led by healthy consumer spending
resulting from tax cuts, and growth in capital investment in the private
sector, which was supported by the low-interest rate monetary policy. The
economies of Europe remained flat through most of 2003, although an increase in
exports accompanying the upturn in the U.S. economy pointed to signs of a
recovery in the region in the latter half of the year. Asian economies grew
substantially during 2003, particularly in China, as the adverse effects of the
Severe Acute Respiratory Syndrome (SARS) epidemic were kept to a minimum. In
Japan, while there were no signs of a turnaround in consumer spending or
employment and income conditions, a gradual recovery was evident during the
second half of the year as exports and capital investment showed steady
improvement. Summary of operations Canon achieved record highs in both consolidated net sales and net income, and
a fourth consecutive year of sales and profit growth, mainly due to a
significant increase in sales of digital cameras and color network digital
multifunction devices, or MFDs. In fiscal 2003, Canon achieved 8.8% growth in
net sales, to Yen 3,198,072 million, marking the first time it has surpassed
the Yen 3,000 billion level, and a 44.6% increase in net income, to Yen 275,730
million. Canons gross profit increased by 14.9%, to Yen 1,608,900 million.
This improvement was the result of an increase in sales volume as well an
improved gross profit ratio, made possible through development reforms that
shortened lead times for new product launches and cost savings realized through
sustained production reforms. Key performance indicator Following are the key performance indicators (KPI) that Canon uses in
managing its business. The changes from year to year in these KPI are set forth
in the table shown below. KEY PERFORMANCE INDICATOR 2003
    
    
    
    
    
    2002
    
    
    
    
    
    2001
    
    
    
    
    
    2000Net sales (Millions of yen)
    
    
    
    
    
    Yen
    3,198,072
    
    
    
    
    
    
    Yen
    2,940,128
    
    
    
    
    
    
    Yen
    2,907,573
    
    
    
    
    
    
    Yen
    2,696,420Gross profit to net sales ratio
    
    
    
    
    
    
    50.3
    %
    
    
    
    
    
    
    47.6
    %
    
    
    
    
    
    
    44.0
    %
    
    
    
    
    
    
    41.5
    %R&D expense to net sales ratio
    
    
    
    
    
    
    8.1
    %
    
    
    
    
    
    
    7.9
    %
    
    
    
    
    
    
    7.5
    %
    
    
    
    
    
    
    7.2
    %Operating profit to net sales ratio
    
    
    
    
    
    
    14.2
    %
    
    
    
    
    
    
    11.8
    %
    
    
    
    
    
    
    9.7
    %
    
    
    
    
    
    
    8.7
    %Inventory turnover within days
    
    
    
    
    
    49 days
    
    
    
    
    
    51 days
    
    
    
    
    
    57 days
    
    
    
    
    
    65 daysDebt to total assets ratio
    
    
    
    
    
    
    3.1
    %
    
    
    
    
    
    
    5.0
    %
    
    
    
    
    
    
    10.4
    %
    
    
    
    
    
    
    13.8
    %
 Note: Inventory turnover within days: Inventory divided by net sales for the previous six months, multiplied by 182.5. -Revenues- As Canon seeks to become a truly excellent global company, one indicator
upon which Canons management places strong emphasis is revenue. Following are
some of the KPI relating to revenues that management considers to be important. Net sales is one of the KPI. Canon derives net sales primarily from the
sale of products, and provision of services relating to its products. Sales
vary based on such factors as product demand, the number and size of
transactions within the reporting period, product reputation for new products,
and changes in sales prices. Other factors involved are market share and market
environment. In addition, management considers an evaluation of net sales by
product group important in assessing Canons performance in sales in various
product groups in light of market trends. Gross profit ratio (ratio of gross profit to net sales) is another KPI for
Canon. Through its reforms in product development, Canon has been striving to
shorten product-development lead times in order to launch new, competitively
priced products at a faster pace. In addition, Canon has achieved cost
reductions through production reforms activities. These achievements have
contributed to improving Canons gross profit ratio, and Canon will continue to
pursue further shortening of product development lead times and reductions in
production cost. Operating profit ratio (ratio of operating profit to net sales) and
research and development (R&D) expense to net sales ratio are considered by
Canon to be KPI. Canon places significant emphasis on operating profit, and is
focusing on two areas for improvement. On one hand, Canon strives to control
and reduce its selling, general and administrative expenses. On the other hand,
Canons R&D policy is designed to maintain a high level of spending in core
technology in order to sustain Canons leading position in its current fields
of business, and to explore possibilities in other markets. Canon believes such
investments will be the basis for future success in its business and
operations. 21




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##### Table of Contents



-Cash Flow Management- Canon also places significant emphasis on cash flow management. The
following are the KPI relating to cash flow management that management believes
to be important. Inventory turnover within days is a KPI because it is a measure of
supply-chain management efficiency. Inventories have inherent risks of becoming
obsolete, deteriorating or otherwise decreasing in value significantly, which
may adversely affect Canons operating results. To mitigate these risks,
management believes that it is important to continue reducing inventories and
shorten production lead times in order to achieve early recovery of related
product expenses by strengthening supply-chain management. Canons management seeks to meet its liquidity and capital requirements
primarily with cash flow from operations and also seeks debt-free operations.
For a manufacturing company such as Canon, the process for realizing profit on
any endeavor can be lengthy, involving as it does R&D, manufacturing, and sales
activities. Management, therefore, believes that it is important to have
sufficient financial strength so that it does not have to rely on external
funding. Canon has continued to reduce its reliance on external funding for
capital investments in favor of generating the necessary funds from its own
operations. Product information On a consolidated basis, Canon divides its businesses into three product
groups: business machines, cameras and optical and other products.  
    
    The business machine product groupincludes office imaging products,
computer peripherals and business information products.
     Office imaging products include office network digital MFDs, color
network digital MFDs, office copying machines,
     personal-use copying
machines and full-color copying machines.
     Computer peripherals include laser beam printers, inkjet printers, inkjet
multifunction peripherals and image scanners.
     Business information products include micrographic equipment, personal
computers and calculators.
    
    The camera product groupincludes single lens reflex (SLR) cameras,
compact cameras, digital cameras and digital video camcorders.
    
    The optical and other products product groupincludes steppers for
semiconductor chip production, mirror projection mask aligners used in
the production of LCDs, television broadcasting lenses and medical
equipment. Effective January 2003, Canon reclassified certain products that were
historically included in business systems, now called business information
products. Facsimiles, including certain personal digital MFDs, are now
classified as office imaging products. Products based on inkjet technology are
now classified as inkjet printers in computer peripherals. In connection with
these business alignment adjustments, copying machines were renamed office
imaging products and business systems were renamed business information
products. Information for previous fiscal years has been reclassified to
conform to the current classification. 
 Critical accounting policies and estimates The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, and
based on the selection and application of significant accounting policies,
which require management to make significant estimates and assumptions. Canon
believes that the following are some of the more critical judgment areas in the
application of its accounting policies that currently affect its financial
condition and results of operations. Revenue recognition Canon recognizes revenue for sales of products when persuasive evidence of an
arrangement exists, delivery has occurred and title and risk of loss have been
transferred to the customer, the sales price is fixed or determinable, and
collectibility is probable. These criteria are met for mass-merchandising
products such as printers and cameras at the time when the product is received
by the customer based on the free-on-board destination sales terms, and for
equipment with acceptance provisions such as steppers and aligners at the time
when the equipment is received by the customer and the specific criteria of the
equipment functionality is successfully tested and demonstrated by Canon to the
customer. Service revenues are derived primarily from maintenance contracts on
our equipment sold to customers and are recognized over the term of the
contracts. A substantial portion of office imaging products is sold with
service maintenance guarantee contracts for which the customer typically pays a
base service fee plus a variable amount based on usage. Allowance for doubtful accounts Allowance for doubtful accounts is determined using a combination of factors to
ensure that Canons trade and financing receivables are not overstated due to
uncollectibility. Canon maintains a bad debt reserve for all customers based on
a variety of factors, including the length of time receivables are past due,
trends in overall weighted average risk rating of the total portfolio,
macroeconomic conditions, significant one-time events and historical
experience. Also, Canon records specific reserves for individual accounts when
Canon becomes aware of a customers inability to meet its financial obligations
to Canon, such as in the case of bankruptcy filings or deterioration in the
customers operating results or financial position. If circumstances related to
customers change, estimates of the recoverability of receivables would be
further adjusted. Valuation of inventories Inventories are stated at the lower of cost or market value. Cost is determined
principally by the average method for domestic inventories and the first-in,
first-out method for overseas inventories. Market value is the estimated
selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make a sale. Canon routinely
reviews its inventories for their salability and for indications of
obsolescence to determine if inventories should be written-down to market
value. Judgments and estimates must be made and used in connection with
establishing such allowances in any accounting period. In estimating the market
value of its inventories, Canon considers the age of the inventories and the
likelihood of spoilage or changes in market demand for its inventories. 22




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##### Table of Contents



Environmental liabilities Canon is subject to liability for the investigation and clean-up of
environmental contamination at each of the properties that Canon owns or
operates, as well as at certain properties Canon formerly owned or operated.
Canon employs extensive internal environmental protection programs that focus
on preventive measures. Canon conducts environmental assessments for a number
of its locations and operating facilities. If Canon was to be held responsible
for damages in any future litigation or proceedings, such costs may not be
covered by insurance and may be material. The liability for environmental
remediation and other environmental costs is accrued when it is considered
probable and costs can be reasonably estimated. Collectibility of receivables Canon is required to estimate the collectibility of its trade receivables. A
considerable amount of judgment is required in assessing the ultimate
realization of these receivables, including the current creditworthiness of
each customer, taking into account business conditions, turnover of receivables
and financial positions of significant customers. Significant changes in
required reserves have been recorded in recent periods and may occur in the
future, depending on the financial status of customers under the current
environment. In case the financial quality of customers becomes worse, reserves
for each customer will increase and will adversely affect net income. Deferred tax assets Canon currently has significant deferred tax assets, which are subject to
periodic recoverability assessments. Realization of Canons deferred tax assets
is principally dependent upon its achievement of projected future taxable
income. Canons judgments regarding future profitability may change due to
future market conditions, its ability to continue to successfully execute its
operating restructuring activities and other factors. Any changes, in any of
these factors may require possible recognition of significant valuation
allowance against these deferred tax asset balances. In the event Canon
considers certain deferred tax assets not to be recoverable, unrecoverable
amounts will be included in income taxes in the statements of income and may
adversely affect net income. Employee retirement and severance benefit plan Canon has significant employee retirement and severance benefit obligations
which are developed from actuarial valuations. Inherent in these valuations are
key assumptions, including discount rates and expected return on plan assets.
Management must consider current market conditions, including changes in
interest rates, in selecting these assumptions. Other assumptions include
assumed rate of increase in compensation levels, mortality rate, and withdrawal
rate. Changes in these assumptions inherent in the valuation are reasonably
likely to occur from period to period. These changes in assumptions may lead to
changes in related employee retirement and severance benefit costs or credits
in the future. Actual net periodic benefit cost may differ from net periodic benefit cost
estimated at the beginning of a period due to changes in assumptions regarding
the discount rate that would in turn affect service costs, changes in
assumptions regarding the expected long-term rate of return on plan assets that
would in turn affect interest cost on projected benefit obligations, and
changes in assumptions regarding net amortization. The revised discount rate
and expected rate of increase in future compensation levels are used to
calculate net periodic benefit cost for the following fiscal year, unless more
current valuations of plan assets and obligations are available. In preparing its financial statements for fiscal 2003, Canon estimated a
discount rate of 2.7% and an expected long-term rate of return on plan assets
of 3.6%. In estimating the discount rate, Canon determines which of its
long-term debt securities have the same maturity period as the remaining
service period, and matches this period with the remaining life expectancy of
Canons participants. In addition, in determining the discount rate, Canon
takes into account estimations with respect to future changes expected by
management in the interest rates of its debt securities. Canon establishes the
expected long-term rate of return on plan assets based on managements
expectations of the long-term return of the various plan asset categories in
which it invests. Management develops expectations with respect to each plan
asset category based on actual historical returns and its current expectations
for future returns. Decreases in discount rates lead to increases in actuarial pension benefit
obligations which, in turn, could lead to an increase in amortization cost
through amortization of actuarial gain or loss, and vice versa. A decrease of
50 basis points in the discount rate increases the projected benefit obligation
by approximately nine percent. The net effect of changes in the discount rate,
as well as the net effect of other changes in actuarial assumptions and
experience, are deferred until subsequent periods, as permitted by Statement of
Financial Accounting Standards No. 87, Employers Accounting for Pensions. Increases in expected return on plan assets may decrease net periodic
benefit cost by increasing expected return amounts, while differences between
expected value and actual fair value of those assets could affect adversely net
income in the following years, and vice versa. For fiscal 2004, if a change of
50 basis points in the expected long-term rate of return on plan assets is to
occur, that may cause a change of approximately ¥2,360 million in net periodic
benefit cost. Canon multiplies managements expected long-term rate of return
on plan assets by the value of its plan assets, such value being calculated by
taking into account potential changes in the fair value of the plan assets, to
arrive at the expected return on plan assets that is included in pension income
(expense). Canon defers recognition of the difference between this expected
return on plan assets and the actual return on plan assets. The net deferral of
unrecognized asset gains (losses) affects the value of plan assets in fiscal
years and, ultimately, future pension income (expense). Canons domestic benefit plan weighted-average asset allocations (see note
11 to the consolidated financial statements) has changed from fiscal 2002 to
fiscal 2003. In particular, cash, as a percentage of total plan assets,
increased to 21.8% in fiscal 2003, compared to 6.8% in fiscal 2002. Canon
increased the relative proportion of cash and decreased the relative proportion
of equity securities and debt securities in anticipation of transferring a
substitutional portion of its defined benefit pension plan to the Japanese
government in fiscal 2004. 23




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##### Table of Contents



Consolidated result of operations 
 Fiscal 2003 compared with fiscal 2002 Summarized results of operations for fiscal 2003 and fiscal 2002 are as
follows: 2003
    
    Change
    
    2002(Millions of yen, except per shareamounts and percentage data)Net sales
    
    
    Yen
    3,198,072
    
    +
    8.8
    %
    
    Yen
    2,940,128Operating profit
    
    
    
    454,424
    
    +
    31.2
    
    
    
    346,359Income before income taxes and minority interest
    
    
    
    448,170
    
    +
    35.8
    
    
    
    330,017Net income
    
    
    
    275,730
    
    +
    44.6
    
    
    
    190,737Earnings per share:Basic
    
    
    
    313,81
   
    +
    44.2
    
    
    
    217.56Diluted
    
    
    
    310,75
    
    +
    44.7
    
    
    
    214.80
 Note: See note of Item 3A Selected Financial Data. Sales With respect to the markets in which the Canon Group operates, demand for
digital cameras and digital video camcorders continued to expand in 2003. While
shifting business demand toward multifunctionality and color stimulated strong
sales of network digital MFDs, computer peripherals, which consists mainly of
printers, struggled amid severe price competition. In the field of optical
products, the semiconductor-production equipment market began to show signs of
a recovery while increased demand for liquid crystal display (LCD)
televisions fueled growth in the market for projection aligners. These
increases were a result of enhanced development reforms activities such as 3D
computer aided design (3D-CAD). These improvements have significantly
shortened product-development lead times and thus made it possible to launch
new, competitively priced products at a faster pace. Under these conditions,
Canons consolidated net sales in fiscal 2003 totaled Yen 3,198,072 million.
This represents an 8.8% increase from the previous fiscal year, reflecting a
significant growth in sales of digital cameras and color network digital MFDs. Overseas operations are significant to Canons operating results and
generated approximately 73% of total net sales in fiscal 2003. Such sales are
denominated in the applicable local currency and are subject to fluctuations in
the value of the yen in relation to such other currencies. Despite efforts to
reduce the impact of currency fluctuations on operating results, including
localizing some manufacturing and procuring parts and materials from overseas
suppliers, Canon believes such fluctuations have had and will continue to have
a significant effect on results of operations. The average value of the yen in
2003 was Yen 115.61 to the U.S. dollar, and Yen 131.02 to the euro,
representing an appreciation of 8% against the U.S. dollar, and a depreciation
of 10% against the euro, compared with the previous year. These effects of
foreign exchange rate fluctuations unfavorably impacted net sales by
approximately Yen 25,100 million. Net sales decreased by approximately Yen
105,800 million in U.S. dollars, increased by Yen 76,400 million in euro, and
increased by Yen 4,300 million in other foreign currencies. Cost of sales Cost of sales reflects principally the cost of raw materials, parts and labor
used by Canon in the manufacture of its products. A portion of the raw
materials used by Canon is imported or includes imported materials. Such raw
materials are subject to fluctuations in world market prices and exchange rates
that may affect Canons cost of sales. Other components of cost of sales
include depreciation expenses from plants, maintenance expenses, light and fuel
expenses and rent expenses. The ratio of cost of sales to net sales for the
past three fiscal years was 49.7%, 52.4% and 56.0%, respectively. Gross profit Canons gross profit in fiscal 2003 increased by 14.9% to Yen 1,608,900 million
from fiscal 2002 as a result of increased sales and an improved gross profit
ratio. Gross profit margins also benefited from cost reductions achieved
through continued production reforms activities. Selling, general and administrative expenses The major components of selling, general and administrative expenses are
payroll, R&D, advertising expenses and other marketing expenses. Selling,
general and administrative expenses increased by 9.6% from the previous year
and amounted to Yen 1,154,476 million. An increase in R&D expenditures and
advertising and other marketing expenses largely accounted for this increase.
Canon maintains a high level of R&D expenditure to strengthen its R&D
capabilities. R&D expenditures grew 10.9% from the previous year to Yen 259,140
million, resulting from increased R&D activities in the area of business
machines and cameras. Advertising and other marketing expenses increased by
39.8% from the previous year to Yen 100,278 million, reflecting managements
policy to strengthen Canons corporate and brand images. Operating profit Operating profit in fiscal 2003 significantly increased by 31.2% to Yen 454,424
million from fiscal 2002. Operating profit in fiscal 2003 was 14.2% of net
sales, compared with 11.8% in fiscal 2002. Other income (deductions) Other income (deductions) improved by Yen 10,088 million, due to the increase
in net interest income resulting from the companys strengthened financial
condition, as well as the decrease in currency exchange losses and improved
earnings of equity affiliates. 24




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##### Table of Contents



Income before income taxes and minority interests Income before income taxes and minority interests in fiscal 2003 was Yen
448,170 million, a 35.8% increase from fiscal 2002, and constituted 14.0% of
net sales. Income taxes Provision for income taxes increased by Yen 27,950 million from fiscal 2002,
primarily as a result of the increase in income before income taxes. The
effective tax rate during the term declined by 4.5% compared with fiscal 2002
due to an increased tax credit for R&D expenditures arising from an amendment
to Japanese tax regulations. Net income Net income in fiscal 2003 increased substantially by 44.6% to Yen 275,730
million, which exceeds the growth rate of income before income taxes. This
represents an 8.6% return on net sales. Sales by product Canons sales by product group are summarized as follows: 2003
    
    Change
    
    2002(Millions of yen except percentage data)Business machines:Office imaging products
    
    Yen
    1,061,099
    
    
    
    +3.7
    %
    
    Yen
    1,023,131Computer peripherals
    
    
    1,089,312
    
    
    
    +3.2
    
    
    
    1,055,956Business information products
    
    
    123,493
    
    
    
    -16.1
    
    
    
    147,108Total business machines
    
    
    2,273,904
    
    
    
    +2.1
    
    
    
    2,226,195Cameras
    
    
    653,540
    
    
    
    +34.5
    
    
    
    485,778Optical and other products.
    
    
    270,628
    
    
    
    +18.6
    
    
    
    228,155Total
    
    Yen
    3,198,072
    
    
    
    +8.8
    %
    
    Yen
    2,940,128
 Sales of business machines, constituting 71% of consolidated net sales,
increased 2.1%, to Yen 2,273,904 million in fiscal 2003. Sales of office imaging products increased 3.7%, to Yen 1,061,099 million.
Demand for network digital MFDs appears to be shifting from monochrome machines
to color models, as well as towards higher-end features. The Color
imageRUNNER(iR) C3200/iRC3200N, Canons first color offerings in the high-end
imageRUNNER(iR)-series lineup, was well received in Japan and overseas markets,
and contributed significantly to increased sales of office imaging products.
Among monochrome network digital MFDs, the high-end iR5000 series and iR105
models continued to record strong sales during the term. Color office imaging
products accounted for 20% and 17% and monochrome office imaging products
accounted for 72% and 75% of office imaging products sales in fiscal 2003 and
2002, respectively. Sales of facsimiles remained flat and accounted for the
remaining 8% of sales of office imaging products in both fiscal 2003 and 2002. Sales of computer peripherals increased 3.2%, to Yen 1,089,312 million.
While sales of laser beam printers were flat in the previous year due to
inventory adjustment by Canons OEM partner, a recovery in orders fueled robust
growth in terms of unit sales during 2003, especially among personal models.
Although unit sales of inkjet printers increased due to favorable acceptance of
such models as the i560, i860, and MultiPASS MP700/MP730 (high-speed
multifunction inkjet systems), severe price competition resulted in a slight
decrease in amount of sales. Sales of computer peripherals as a whole mainly
increased, due to increased sales of laser beam printers. The adverse effect of
severe price competition on sales of computer peripherals was more than offset
by a rise in unit sales. As a result, sales of computer peripherals in 2003
increased by 3.2%. Sales of business information products decreased 16.1%, to Yen 123,493
million, in fiscal 2003, mainly due to managements decision to curtail sales
of personal computers on stand-alone basis, because such sales were
unprofitable, and to concentrate more on providing comprehensive business
solutions. Sales of cameras continued to achieve significant sales growth of 34.5%,
totaling Yen 653,540 million. Amid the continued strong demand for digital
cameras worldwide, Canon launched several new compact digital cameras in 2003,
including six new PowerShot-series models and three new DIGITAL ELPH-series.
These new products, led by the PowerShot S400 DIGITAL ELPH and PowerShot A70,
contributed significantly to an increase in sales. Canons digital single-lens
reflex cameras also enjoyed sales growth, supported by the introduction of new
product lineups, including the EOS 10D, launched in the first half of 2003, and
the EOS Digital Rebel, launched in September 2003. Sales of conventional film
cameras continued to decline amid the increasing popularity of digital models.
Digital cameras accounted of 61% and 45% and conventional film cameras
accounted for 21% and 31% of camera sales in fiscal 2003 and 2002,
respectively. Video camcorders accounted for the remaining 18% and 24% of
camera sales in fiscal 2003 and 2002, respectively. In the field of digital
video camcorders, the eight new products Canon launched in fiscal 2003,
including the OPTURA 300, as well as the ZR Series (ZR60, ZR65, ZR70),
contributed to increased sales. Sales of cameras constituted 20% of
consolidated net sales in fiscal 2003, an increase of 4% from fiscal 2002,
primarily due to increased sales of digital cameras. Sales of optical and other products increased 18.6%, to Yen 270,628
million. Sales of aligners for the production of LCDs displayed notable growth
as the PC monitor industry continued its shift from cathode-ray tube (CRT) to
LCD computer displays, and the LCD television market continued to expand. Sales
of steppers, used for the production of semiconductors, also increased as the
semiconductor market began to show signs of a turnaround. Sales of optical and
other products constituted 9% of consolidated net sales in fiscal 2003 and
increased 18.6% from fiscal 2002, primarily due to increased sales of aligners
for LCDs and steppers. 25




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##### Table of Contents



Sales by region A summary of net sales by region in fiscal 2003 and fiscal 2002 is
provided below: 2003
    
    Change
    
    2002(Millions of yen, except percentage data)Japan
    
    Yen
    801,400
    
    
    
    +9.4
    %
    
    Yen
    732,551Americas
    
    
    1,045,166
    
    
    
    +3.5
    
    
    
    1,010,166Europe
    
    
    969,042
    
    
    
    +13.1
    
    
    
    857,167Others
    
    
    382,464
    
    
    
    +12.4
    
    
    
    340,244Total
    
    Yen
    3,198,072
    
     
   
    +8.8
    %
    
    Yen
    2,940,128
 Note: This summary of net sales by region of destination is determined by the
location of the customer. A geographical analysis indicates that net sales in fiscal 2003 increased in
every region. In Japan, net sales increased by 9.4% in fiscal 2003 despite a decrease in
sales of personal computers due to Canons intentional curtailment of such
sales in Japan. The results were mainly attributable to increased sales of
office imaging products and digital cameras. Color network digital MFDs, which
include the Color imageRUNNER(iR) C3200/iRC3200N, have been well received,
contributing to increased sales of office imaging products. In the Americas, net sales increased by 11.9% on a local currency basis,
mainly due to increased sales of digital cameras, network digital MFDs and
laser beam printers. Sales of digital cameras experienced continued strong
demand and benefited from the effect of newly-launched products. After
accounting for the appreciation of the yen against the U.S. dollar, net sales
in the Americas increased by 3.5%. In Europe, net sales increased by 5.4% on a local currency basis, mainly
due to increased sales of digital cameras and laser beam printers. After
accounting for the depreciation of the yen against the euro, net sales in
Europe grew 13.1% in fiscal 2003. Sales in other areas increased by 12.4% on a yen basis in fiscal 2003,
reflecting overall sales growth, particularly in digital cameras and
semiconductor equipment. Operating profit by product Operating profit for business machines in fiscal 2003 increased Yen 76,080
million to Yen 487,096 million. Operating profit ratio also improved by 2.9% to
21.4%. Sales of business machines in fiscal 2003 totaled Yen 2,273,904 million,
an increase of 2.1%. In addition to cost-cutting measures and the introduction
of new price-competitive products, which contributed to an improvement in the
gross profit ratio, a steady increase in sales volume resulted in an increase
in operating profit in fiscal 2003 of 18.5%. Operating profit for cameras increased Yen 56,028 million to Yen 126,318
million. Significantly improved profitability for camera products resulted from
the rapid growth in sales of digital cameras, along with a significant
improvement in the gross profit ratio, made possible through effective
cost-saving initiatives in development and production reforms activities.
Consequently, operating profit in the camera segment increased by 79.7%. Optical and other products generated operating losses of Yen 11,414 million in
2003, an improvement from losses of Yen 11,652 million in fiscal 2002, despite
increased sales of 18.5% for the segment. These continuing operating losses are
primarily the result of severe price competition and a one-time expense for the
disposal of inventories relating to obsolete scanning steppers. 26




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##### Table of Contents



Segment information by product and by geographic area for the years ended
December 31, 2003 and 2002 are shown below. This segment information is
prepared under Japanese GAAP. The following table provides segment information by product: As of / for the year ended December 31, 2003Business
    
    
    
    
    
    Optical and other
    
    Corporate andmachines
    
    Cameras
    
    products
    
    eliminations
    
    Consolidated(Millions of Yen )Net sales:Unaffiliated customers
    
    Yen
    2,273,904
    
    
    Yen
    653,540
    
    
    Yen
    270,628
    
    
    
    
    
    
    Yen
    3,198,072Intersegment
    
    
    
    
    
    
    
    
    
    
    141,718
    
    
    Yen
    (141,718
    )
    
    
    Total
    
    
    2,273,904
    
    
    
    653,540
    
    
    
    412,346
    
    
    
    (141,718
    )
    
    
    3,198,072Operating cost and expenses
    
    
    1,786,808
    
    
    
    527,222
    
    
    
    423,760
    
    
    
    5,858
    
    
    
    2,743,648Operating profit
    
    Yen
    487,096
    
    
    Yen
    126,318
    
    
    Yen
    (11,414
    )
    
    Yen
    (147,576
    )
    
    Yen
    454,424Assets
    
    Yen
    1,260,790
    
    
    Yen
    317,672
    
    
    Yen
    418,208
    
    
    Yen
    1,185,478
    
    
    Yen
    3,182,148Depreciation and amortization
    
    
    118,556
    
    
    
    17,712
    
    
    
    20,526
    
    
    
    26,810
    
    
    
    183,604Capital expenditure
    
    
    105,700
    
    
    
    25,894
    
    
    
    31,483
    
    
    
    46,961
    
    
    
    210,038
 As of / for the year ended December 31, 2002Business
    
    
    
    
    
    Optical and other
    
    Corporate andmachines
    
    Cameras
    
    products
    
    eliminations
    
    Consolidated(Millions of Yen )Net sales:Unaffiliated customers
    
    Yen
    2,226,195
    
    
    Yen
    485,778
    
    
    Yen
    228,155
    
    
    
    
    
    
    Yen
    2,940,128Intersegment
    
    
    
    
    
    
    
    
    
    
    139,608
    
    
    Yen
    (139,608
    )
    
    
    Total
    
    
    2,226,195
    
    
    
    485,778
    
    
    
    367,763
    
    
    
    (139,608
    )
    
    
    2,940,128Operating cost and expenses
    
    
    1,815,179
    
    
    
    415,488
    
    
    
    379,415
    
    
    
    (16,313
    )
    
    
    2,593,769Operating profit
    
    Yen
    411,016
    
    
    Yen
    70,290
    
    
    Yen
    (11,652
    )
    
    Yen
    (123,295
    )
    
    Yen
    346,359Assets
    
    Yen
    1,296,829
    
    
    Yen
    263,532
    
    
    Yen
    338,377
    
    
    Yen
    1,043,968
    
    
    Yen
    2,942,706Depreciation and amortization
    
    
    106,865
    
    
    
    14,118
    
    
    
    19,817
    
    
    
    24,460
    
    
    
    165,260Capital expenditure
    
    
    104,877
    
    
    
    15,627
    
    
    
    23,767
    
    
    
    54,431
    
    
    
    198,702
 Notes:  (1)
    
    General corporate expenses of Yen  147,616 million in fiscal 2003 and Yen 
123,193 million in fiscal 2002 are included in Corporate and
eliminations.  (2)
    
    Corporate assets of Yen  1,185,506 million in fiscal 2003 and Yen  1,044,036
million in fiscal 2002, which consist mainly of cash and cash equivalents,
marketable securities and corporate properties, are included in Corporate
and eliminations. 27




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##### Table of Contents



The following table provides segment information by geographic area: As of / for the year ended December 31, 2003Corporate andJapan
    
    Americas
    
    Europe
    
    Others
    
    eliminations
    
    Consolidated(Millions of Yen )Net sales:Unaffiliated customers
    
    Yen
    856,851
    
    
    Yen
    1,044,998
    
    
    Yen
    968,938
    
    
    Yen
    327,285
    
    
    
    
    
    
    Yen
    3,198,072Intersegment
    
    
    1,662,172
    
    
    
    8,101
    
    
    
    3,861
    
    
    
    503,119
    
    
    Yen
    (2,177,253
    )
    
    
    Total
    
    
    2,519,023
    
    
    
    1,053,099
    
    
    
    972,799
    
    
    
    830,404
    
    
    
    (2,177,253
    )
    
    
    3,198,072Operating cost and expenses
    
    
    2,025,442
    
    
    
    998,492
    
    
    
    946,282
    
    
    
    806,281
    
    
    
    (2,032,849
    )
    
    
    2,743,648Operating profit
    
    Yen
    493,581
    
    
    Yen
    54,607
    
    
    Yen
    26,517
    
    
    Yen
    24,123
    
    
    Yen
    (144,404
    )
    
    Yen
    454,424Assets
    
    Yen
    1,600,726
    
    
    Yen
    306,140
    
    
    Yen
    546,625
    
    
    Yen
    249,755
    
    
    Yen
    478,902
    
    
    Yen
    3,182,148
 As of / for the year ended December 31, 2002Corporate andJapan
    
    Americas
    
    Europe
    
    Others
    
    eliminations
    
    Consolidated(Millions of Yen )Net sales:Unaffiliated customers
    
    Yen
    789,066
    
    
    Yen
    1,007,572
    
    
    Yen
    852,931
    
    
    Yen
    290,559
    
    
    
    
    
    
    Yen
    2,940,128Intersegment
    
    
    1,475,091
    
    
    
    9,791
    
    
    
    4,639
    
    
    
    426,914
    
    
    Yen
    (1,916,435
    )
    
    
    Total
    
    
    2,264,157
    
    
    
    1,017,363
    
    
    
    857,570
    
    
    
    717,473
    
    
    
    (1,916,435
    )
    
    
    2,940,128Operating cost and expenses
    
    
    1,867,817
    
    
    
    969,542
    
    
    
    836,341
    
    
    
    699,420
    
    
    
    (1,779,351
    )
    
    
    2,593,769Operating profit
    
    Yen
    396,340
    
    
    Yen
    47,821
    
    
    Yen
    21,229
    
    
    Yen
    18,053
    
    
    Yen
    (137,084
    )
    
    Yen
    346,359Assets
    
    Yen
    1,485,238
    
    
    Yen
    346,021
    
    
    Yen
    460,521
    
    
    Yen
    202,388
    
    
    Yen
    448,538
    
    
    Yen
    2,942,706
 Notes:  (1)
    
    General corporate expenses of Yen  147,616 million in fiscal 2003 and Yen 
123,193 million in fiscal 2002 are included in Corporate and eliminations.(2)
    
    Corporate assets of Yen  1,185,506 million in fiscal 2003 and Yen  1,044,036
million in fiscal 2002, which consist mainly of cash and cash equivalents,
marketable securities and corporate properties, are included in Corporate
and eliminations.(3)
    
    Segment information by geographic area is determined by the location of
Canon or its relevant subsidiary. 28




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##### Table of Contents



Fiscal 2002 compared with fiscal 2001 Canon achieved record highs in fiscal 2002 in both consolidated net sales and
net income, and the third consecutive year of sales and profit growth, mainly
due
to a significant increase in sales of digital cameras and digital video
camcorders, and steady growth in the office imaging product group. In fiscal
2002, Canon achieved 1.1% growth in sales, to Yen 2,940,128 million, and a
13.8% increase in net income, to Yen 190,737 million. The improvement in profit
margins in fiscal 2002 was largely attributable to cost reductions from product
reformation activities and shortened lead times for bringing new products to
market. Summarized results of operations for fiscal 2002 and fiscal 2001 are as
follows: 2002
    
    Change
    
    2001(Millions of yen except per shareamounts and percentage data)Net sales
    
    Yen
    2,940,128
    
    
    
    +     1.1
    %
    
    Yen
    2,907,573Operating profit
    
    
    346,359
    
    
    
    +   22.9
    
    
    
    281,839Income before income taxes and minority interest
    
    
    330,017
    
    
    
    +   17.2
    
    
    
    281,566Income before cumulative effect of
change in accounting principle
    
    
    190,737
    
    
    
    +   16.4
    
    
    
    163,869Net income
    
    
    190,737
    
    
    
    +   13.8
    
    
    
    167,561Earnings per share:Income before cumulative effect of change in accounting principle:Basic
    
    
    217.56
    
    
    
    +   16.3
    
    
    
    187.07Diluted
    
    
    214.80
    
    
    
    +   16.4
    
    
    
    184.55Net income:Basic
    
    
    217.56
    
    
    
    +   13.7
    
    
    
    191.29Diluted
    
    
    214.80
    
    
    
    +   13.8
    
    
    
    188.70
 Note: See note of Item 3A Selected Financial Data. Sales The global economy reflected the following trends in 2002. The U.S.
economy exhibited to signs of an economic upturn at the beginning of the year,
led mainly by progress made in the area of inventory adjustment. In the second
half of the year, however, the economic recovery in the United States began
losing its momentum, owing to deterioration in consumer confidence, which
resulted in sluggish consumer spending, and the collapse of several major
companies, which led to a decline in business confidence. While European
economies recovered moderately overall in 2002, the pace of recovery
decelerated in Germany and France during the latter half of the year. In Asia,
Chinas economy continued to grow substantially while the other economies in
the region sustained modest growth. The Japanese economy remained stagnant
throughout the year with no signs of a recovery amid the harsh backdrop of
falling stock prices and growing uncertainty over prospects for a recovery in
the global economy, especially in the United States. With respect to the markets in which the Canon Group operates, flagging
global demand for personal computers resulted in reduced demand for printers
and other IT-related equipment, while corporate-use digital copying machines,
especially multifunction and color machines, posted favorable results. The
digital camera and digital video camcorder markets continued to show strong
growth in Japan and overseas, supported by robust demand. In the field of
semiconductor-production equipment, price and volume declines in the memory
device market due to weak sales of personal computers inhibited a recovery in
capital spending by chip manufacturers. The average value of the yen in 2002 was Yen 124.73 to
the U.S. dollar, and Yen 118.39 to the euro, a depreciation of 3% and 8%,
respectively, compared with the previous year. Amid these conditions, Canon recorded 1.1% growth in sales, to Yen
2,940,128 million. This growth reflected increased sales of digital cameras and
digital video camcorders, and steady growth in the office imaging segment
offsetting decline in semiconductor production equipment and other product
lines. Cost of sales Cost of sales reflects principally the cost of raw materials, parts and
labor used by Canon in the manufacture of its products. A portion of the raw
materials used by Canon is imported or includes imported materials. Such raw
materials are subject to fluctuations in world market prices and exchange rates
that may affect Canons cost of sales. Other components of cost of sales
include depreciation expenses from plants, maintenance expenses, light and fuel
expenses and rent expenses. The ratio of cost of sales to net sales for the
past three fiscal years was 52.4%, 56.0% and 58.5%, respectively. Selling, general and administrative expenses Selling, general and administrative expenses increased 5.5% from the
previous year and amounted to Yen 1,053,672 million. This increase was
primarily attributed to increase in R&D expenditures and advertising and
marketing costs. Canon maintains a high level of R&D expenditure to strengthen
its R&D capabilities. R&D expenditures increased 6.9% from the previous year to
Yen 233,669 million, resulting from increased R&D activities relating to
cameras and optical and other products. Operating profit Operating profit in fiscal 2002 totaled Yen 346,359 million, an increase
of 22.9% from the previous year. Operating profit in fiscal 2002 was 11.8% of
net sales, compared with 9.7% in fiscal 2001. In fiscal 2002, the depreciation
of the yen increased net sales by approximately Yen 93,300 million and
increased cost of sales by approximately Yen 15,300 million. Canons gross
profit ratio during the year improved 3.6% to 47.6%. This improvement in gross
profit margins reflects the positive effects of reforms with respect to Canons
research and development (R&D) reformation activities, such as the
incorporation of 3D computer aided design (3D-CAD). These improvements have
significantly shortened product-development lead times and thus made it
possible to launch competitive new products in succession, which has supported
favorable pricing. Gross profit margins have also benefited from reductions
achieved through continued production reformation activities, and the lower
value of the yen. 29




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##### Table of Contents



Other income (deductions) In the area of other income and expenses, the promotion of cash flow
management has bolstered Canons financial strength, evidenced by an
improvement in net interest income of Yen 3,551 in fiscal 2002 million compared
with fiscal 2001, achieving a positive figure in this category for the first
time. Currency exchange losses, however, increased by Yen 8,667 million to Yen
23,468 million, while securities contributed to the Companys retirement
benefit trust in fiscal 2001 resulted in a Yen 15,536 million gain.
Consequently, non-operating income and expenses in fiscal 2002 worsened by Yen
16,069 million from fiscal 2001. Income before income taxes and minority interests Income before income taxes in fiscal 2002 was Yen 330,017 million, a 17.2%
increase from fiscal 2001, and constituted 11.2% of net sales. Net income Net income in fiscal 2002 totaled Yen 190,737 million, an increase of
13.8% from fiscal 2001. This amount represents a 6.5% return on net sales.
Income taxes as a percent of income before income taxes in fiscal 2002 remained
at approximately the same level as for fiscal 2001, decreasing by 0.1% to
40.8%. Sales by product Canons sales by product group are summarized as follows: 2002
    
    Change
    
    2001(Millions of yen except percentage data)Business machines:Office imaging products
    
    Yen
    1,023,131
    
    
    
    +   4.4
    %
    
    Yen
    980,053Computer peripherals
    
    
    1,055,956
    
    
    
    +   0.8
    
    
    
    1,047,385Business information products
    
    
    147,108
    
    
    
     25.0
    
    
    
    196,051Total business machines
    
    
    2,226,195
    
    
    
    +   0.1
    
    
    
    2,223,489Cameras
    
    
    485,778
    
    
    
    + 27.4
    
    
    
    381,367Optical and other products
    
    
    228,155
    
    
    
     24.6
    
    
    
    302,717Total
    
    Yen
    2,940,128
    
    
    
    +   1.1
    %
    
    Yen
    2,907,573
 Sales of business machines (office imaging products, computer peripherals
and business information products), constituting 75.7% of consolidated net
sales, increased 0.1%, to Yen 2,226,195 million in fiscal 2002. Sales of office imaging products (including digital, color, office and
personal models) increased 4.4%, to Yen 1,023,131 million. In the copying
machines sub-segment, Canons imageRUNNER(iR)-series lineup of 16 to 105
copy-per-minute digital networked black-and-white multifunction copying
machines showed steady sales growth in fiscal 2002. In particular, the
mid-range iR2200/2800/3300 series and the high-end iR5000/6000 series, iR7200
and iR105 model recorded healthy sales during the term. While the color copying
machine market showed some growth during the year, reflecting the growing
acceptance of color office documents, sales of Canon color copying machines
decreased slightly in fiscal 2002 due to a decrease in unit sales of high-end
models. Sales of computer peripherals (mainly laser beam printers, inkjet printers
and image scanners) suffered a slight decline of 0.8%, to Yen 1,055,956
million. While unit sales of laser beam printers increased in 2002, total sales
slightly decreased due to an overall trend toward sales of lower-end models and
to the strategic reduction of inventory balances by Canons original equipment
manufacturing (OEM) partner in the first half of 2002. The introduction of
new inkjet printer products, such as the BJ S500/300-series lineup and PIXUS
950i/550i models, contributed to strong sales of inkjet printers in the
Japanese and U.S. markets. Although unit sales of inkjet printers decreased in
2002 compared to the prior year, total sales increased due to growth in sales
of mid- and high-end models. Sales of the business information products (including micrographic
equipment, personal computers and calculators) decreased 25.0%, to
Yen 147,108 million in fiscal 2002. The decrease was mainly due to the
declining sales of personal computers in Japan. Sales of cameras increased 27.4%, to Yen 485,778 million. Demand for
digital cameras continued to be strong worldwide, with the successive
introductions of new compact PowerShot-series and IXY DIGITAL-series models
bolstering Canons lineup and contributing to a significant increase in sales.
Also well received by the market were the EOS D60 and EOS-1Ds digital SLR
models, which were also introduced in fiscal 2002. As a result, the unit sales
for digital cameras nearly doubled the number for the previous year. In
contrast, sales of conventional film cameras continued to slip in fiscal 2002
amid the increasing popularity of digital models and price competition. Sales
of digital video camcorders continued to show substantial growth, supported by
the introduction of new ZR-series, Elura-series and Optura-series models.
Consequently, camera sales overall enjoyed double-digit 27.4% growth in fiscal
2002. Sales of optical and other products (including steppers for semiconductor
chip production, aligners for liquid crystal displays, TV broadcasting lenses,
medical equipment) decreased 24.6%, to Yen 228,155 million, mainly due to a
decrease in unit sales of steppers for semiconductor chip production. The
decrease is attributable to a drop in demand for semiconductor-production
equipment, reflecting restrained capital spending by memory device
manufacturers. Sales of optical and other products constituted 7.8% of
consolidated net sales in fiscal 2002, which decreased 2.6% compared with
fiscal 2001. 30




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##### Table of Contents



Sales by region Net sales in fiscal 2002 increased in the Americas, Europe and other
areas, but decreased in Japan. In Japan, net sales decreased by 11.5% in fiscal 2002. Sales of personal
computers and semiconductor production equipment declined due to a decrease in
the number of units sold. In the Americas, net sales slightly increased by 0.4%
on a local currency basis. This increase was mainly attributable to increased
sales of digital cameras and digital video camcorders, and was partially offset
the negative impact of a decline in laser beam printer sales due to a strategic
reduction of inventory balances by Canons OEM partner. The depreciation of the
yen resulted in a 2.9% increase in sales in the Americas related to the
translation of U.S. dollar sales to Japanese yen. In Europe, net sales
decreased by 1.3% on a local currency basis. Sales growth in digital cameras
offset sales declines in semiconductors production equipment and inkjet
printers. After accounting for the depreciation of the yen, net sales in Europe
increased 6.3% in fiscal 2002. Sales in other areas increased 16.5% in fiscal
2002, reflecting significant overall sales growth, particularly in digital
cameras and digital video camcorders. A summary of net sales by region in fiscal 2002 and fiscal 2001 is
provided below: 2002
    
    Change
    
    2001(Millions of yen, except percentage data)Japan
    
    Yen
    732,551
    
    
    
    11.5
    %
    
    Yen
    827,288Americas
    
    
    1,010,166
    
    
    +
    2.9
    
    
    
    982,104Europe
    
    
    857,167
    
    
    +
    6.3
    
    
    
    806,104Others
    
    
    340,244
    
    
    +
    16.5
    
    
    
    292,077Total
    
    Yen
    2,940,128
    
    
    +
    1.1
    %
    
    Yen
    2,907,573
 Note:  This summary of net sales by region of destination is determined by the
location of the customer. Operating profit by product Operating profit for business machines in fiscal 2002 increased Yen 76,098
million to Yen 411,016 million. Operating profit ratio also improved by 3.4% to
18.5%. Sales of business machines overall remained at approximately the same
level as for fiscal 2001, increasing by 0.1% to Yen 2,226,195 million in fiscal
2002. Cost cutting measures, however, along with healthy sales of
price-competitive mid-range and high-end copying machines and bubble jet
printers favorably affected operating profit ratio. As a result, operating
profit for the business machine segment increased by 22.7%. Operating profit for cameras increased Yen 34,146 million to Yen 70,290
million. Greatly improved profitability for camera products, realized through
the rapid rise in sales of digital cameras and digital video camcorders coupled
with effective cost-cutting measures and a decline in the price of electronic
components, boosted operating profit in the camera segment by 94.5%. Optical and other products, which recorded an operating profit of Yen
23,850 million in fiscal 2001, suffered operating losses of Yen 11,652 million
in fiscal 2002 mainly due to a 24.6% decrease in sales of semiconductor
production equipment, reflecting restrained capital spending by memory device
manufacturers. 31




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Segment information by product and by geographic area for the years ended
December 31, 2002 and 2001. This segment information is prepared under Japanese
GAAP. The following table provides segment information by product: As of/for the year ended December 31, 2002OpticalBusiness
    
    
    
    
    
    and other
    
    Corporate andmachines
    
    Cameras
    
    products
    
    eliminations
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    Yen
    2,226,195
    
    
    Yen
    485,778
    
    
    Yen
    228,155
    
    
    
    
    
    
    Yen
    2,940,128Intersegment
    
    
    
    
    
    
    
    
    
    
    139,608
    
    
    Yen
    (139,608
    )
    
    
    Total
    
    
    2,226,195
    
    
    
    485,778
    
    
    
    367,763
    
    
    
    (139,608
    )
    
    
    2,940,128Operating cost and expenses
    
    
    1,815,179
    
    
    
    415,488
    
    
    
    379,415
    
    
    
    (16,313
    )
    
    
    2,593,769Operating profit
    
    Yen
    411,016
    
    
    Yen
    70,290
    
    
    Yen
    (11,652
    )
    
    Yen
    (123,295
    )
    
    Yen
    346,359Assets
    
    Yen
    1,296,829
    
    
    Yen
    263,532
    
    
    Yen
    338,377
    
    
    Yen
    1,043,968
    
    
    Yen
    2,942,706Depreciation and amortization
    
    
    106,865
    
    
    
    14,118
    
    
    
    19,817
    
    
    
    24,460
    
    
    
    165,260Capital expenditure
    
    
    104,877
    
    
    
    15,627
    
    
    
    23,767
    
    
    
    54,431
    
    
    
    198,702As of/for the year ended December 31, 2001OpticalBusiness
    
    
    
    
    
    and other
    
    Corporate andmachines
    
    Cameras
    
    products
    
    eliminations
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    Yen
    2,223,489
    
    
    Yen
    381,367
    
    
    Yen
    302,717
    
    
    
    
    
    
    Yen
    2,907,573Intersegment
    
    
    
    
    
    
    
    
    
    
    116,748
    
    
    Yen
    (116,748
    )
    
    
    Total
    
    
    2,223,489
    
    
    
    381,367
    
    
    
    419,465
    
    
    
    (116,748
    )
    
    
    2,907,573Operating cost and expenses
    
    
    1,888,571
    
    
    
    345,223
    
    
    
    395,615
    
    
    
    (3,675
    )
    
    
    2,625,734Operating profit
    
    Yen
    334,918
    
    
    Yen
    36,144
    
    
    Yen
    23,850
    
    
    Yen
    (113,073
    )
    
    Yen
    281,839Assets
    
    Yen
    1,280,949
    
    
    Yen
    215,173
    
    
    Yen
    361,799
    
    
    Yen
    986,835
    
    
    Yen
    2,844,756Depreciation and amortization
    
    
    105,907
    
    
    
    12,745
    
    
    
    15,291
    
    
    
    18,357
    
    
    
    152,300Capital expenditure
    
    
    121,333
    
    
    
    16,871
    
    
    
    36,057
    
    
    
    33,413
    
    
    
    207,674
 Notes:  (1)
    
    General corporate expenses of Yen 123,193 million in fiscal 2002 and Yen
113,128 million in fiscal 2001 are included in Corporate and
eliminations.(2)
    
    Corporate assets of Yen 1,044,036 million in fiscal 2002 and Yen 986,801
million in fiscal 2001, which consist mainly of cash and cash equivalents,
marketable securities and corporate properties, are included in Corporate and
eliminations. 32




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The following table provides segment information by geographic area: As of/for the year ended December 31, 2002Corporate andJapan
    
    Americas
    
    Europe
    
    Others
    
    eliminations
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    Yen
    789,066
    
    
    Yen
    1,007,572
    
    
    Yen
    852,931
    
    
    Yen
    290,559
    
    
    
    
    
    
    Yen
    2,940,128Intersegment
    
    
    1,475,091
    
    
    
    9,791
    
    
    
    4,639
    
    
    
    426,914
    
    
    Yen
    (1,916,435
    )
    
    
    Total
    
    
    2,264,157
    
    
    
    1,017,363
    
    
    
    857,570
    
    
    
    717,473
    
    
    
    (1,916,435
    )
    
    
    2,940,128Operating cost and expenses
    
    
    1,867,817
    
    
    
    969,542
    
    
    
    836,341
    
    
    
    699,420
    
    
    
    (1,779,351
    )
    
    
    2,593,769Operating profit
    
    Yen
    396,340
    
    
    Yen
    47,821
    
    
    Yen
    21,229
    
    
    Yen
    18,053
    
    
    Yen
    (137,084
    )
    
    Yen
    346,359Assets
    
    Yen
    1,485,238
    
    
    Yen
    346,021
    
    
    Yen
    460,521
    
    
    Yen
    202,388
    
    
    Yen
    448,538
    
    
    Yen
    2,942,706
  As of/for the year ended December 31, 2001Corporate andJapan
    
    Americas
    
    Europe
    
    Others
    
    eliminations
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    Yen
    858,580
    
    
    Yen
    983,561
    
    
    Yen
    805,243
    
    
    Yen
    260,189
    
    
    
    
    
    
    Yen
    2,907,573Intersegment
    
    
    1,378,031
    
    
    
    17,475
    
    
    
    2,449
    
    
    
    299,410
    
    
    Yen
    (1,697,365
    )
    
    
    Total
    
    
    2,236,611
    
    
    
    1,001,036
    
    
    
    807,692
    
    
    
    559,599
    
    
    
    (1,697,365
    )
    
    
    2,907,573Operating cost and expenses
    
    
    1,893,448
    
    
    
    969,630
    
    
    
    806,495
    
    
    
    546,291
    
    
    
    (1,590,130
    )
    
    
    2,625,734Operating profit
    
    Yen
    343,163
    
    
    Yen
    31,406
    
    
    Yen
    1,197
    
    
    Yen
    13,308
    
    
    Yen
    (107,235
    )
    
    Yen
    281,839Assets
    
    Yen
    1,376,939
    
    
    Yen
    346,046
    
    
    Yen
    423,295
    
    
    Yen
    174,553
    
    
    Yen
    523,923
    
    
    Yen
    2,844,756
 Notes:  (1)
    
    General corporate expenses of Yen 123,193 million in fiscal 2002 and Yen
113,128 million in fiscal 2001 are included in Corporate and eliminations.(2)
    
    Corporate assets of Yen 1,044,036 million in fiscal 2002 and Yen 986,801
million in fiscal 2001, which consist mainly of cash and cash equivalents,
marketable securities and corporate properties, are included in Corporate and
eliminations.(3)
    
    Segment information by geographic area is determined by the location of
Canon or its relevant subsidiary. 
 Foreign operations and foreign currency transactions Canons marketing activities are performed by subsidiaries in various regions
in local currencies, while the cost of goods sold is generally in yen. Given
Canons current operating structure, appreciation of the yen has a negative
impact on net sales and the gross profit ratio. To reduce the financial risks
from changes in foreign exchange rates, Canon utilizes derivative financial
instruments, which are comprised principally of forward currency exchange
contracts. The return on foreign operation sales is usually lower than that from
domestic operations because foreign operations consist mainly of marketing
activities. Return on foreign operation sales is calculated by dividing net
income of foreign subsidiaries, after factoring in a consolidation adjustment
between foreign subsidiaries, by net sales of foreign subsidiaries. Marketing
activities are generally less profitable than production activities, which are
mainly conducted by the Company and its domestic subsidiaries. The returns on
foreign operation sales in fiscal 2003, 2002 and 2001 were 3.2%, 2.7% and 1.6%,
respectively. This compares with returns of 8.6%, 6.5% and 5.8% on total
operations for the respective years. 
 Recent developments On January 1, 2004, Canon Precision Inc. (Canon Precision), a
wholly-owned subsidiary of Canon Inc., merged with Hirosaki Precision, Inc.
(Hirosaki Precision), a wholly-owned subsidiary of Canon Precision. Hirosaki
Precision was merged into Canon Precision, the surviving company. Canon
Precision targets the improved efficiency and specialization of business
operations. Since both Canon Precision and Hirosaki Precision were consolidated
subsidiaries of Canon Inc., the merger has no impact on Canons current or
future business results. On January 1, 2004, Canon N.T.C., Inc. (Canon N.T.C.), a wholly-owned
subsidiary of Canon Inc., spun off its environmental business operations into a
newly established company, named Canon Ecology Industry Inc. Following the
separation, Canon N.T.C. focused its energies on its semiconductor equipment-
related business and was renamed Canon Semiconductor Equipment Inc. The
spin-off was intended to improve efficiency and the specialization of business
operations while facilitating the pursuit of independent businesses, consistent
with Canons Excellent Global Corporation Plan. 33




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B.   Liquidity and capital resources 
 Liquidity Cash and cash equivalents in
fiscal 2003 increased Yen 169,027 million to Yen 690,298
million, compared with Yen 521,271 million in fiscal 2002 and
Yen 506,234 million in
fiscal 2001. Canons cash and cash equivalents are primarily denominated in
Japanese yen, with the remainder denominated in foreign currencies such as the
U.S. dollar. Net cash provided by operating activities in fiscal 2003 increased by Yen
16,699 million from the previous year, to Yen 465,649 million. Canons cash
inflow is primarily composed of cash received from customers, and its cash
outflow is primarily composed of payments by Canon for parts and materials,
selling, general and administrative expenses, and income taxes. For fiscal 2003, cash inflow from cash received from customers increased,
due to an increase in net sales. This increase in cash inflow was within the
range of the increase in net sales, as there were no significant changes in
Canons collection rates. Cash outflow for payments for parts and materials
also increased, as a result of an increase in net sales. However, this increase
was less than the increase in net sales, due reductions in production costs.
Production costs declined as a result of both a decline in unit prices of parts
and raw materials, as well as Canons efforts to streamline production
processes. Cash outflow for payroll payments increased, due to an increase in
the number of employees. Employees in the Asian region increased, due to the
expansion of production in this region. Cash outflow for payments for selling,
general and administrative expenses increased, due to an increase in
advertising and marketing expenses, reflecting managements policy to
strengthen Canons corporate brand image. Cash outflow for payments of income
taxes increased, due to an increase in taxable income. Net cash used in investing activities in fiscal 2003 was Yen 199,948
million, compared with Yen 230,220 million in fiscal 2002 and Yen 192,592 million
in fiscal 2001, which consists primarily of capital expenditures. Capital
expenditures in fiscal 2003 totaled Yen 210,038 million, mainly to expand
production capabilities in Japan and overseas. Of the Yen 24,341 million payment
for the purchase of other investments, Yen 12,718 million is attributable to the
acquisition of Sumitomo Metal System Solutions Co., Ltd., now Canon System
Solutions Inc. As a result, free cash flow, or cash flow from operating activities minus
cash flow from investing activities, totaled Yen 265,701 million for fiscal 2003
as compared to Yen 218,730 million for fiscal 2002. Net cash used in financing activities totaled Yen 102,039 million in fiscal
2003, mainly resulting from Canons active efforts to repay short-term loans
and long-term debts towards the goal of improving the Companys financial
position, including the redemption of Yen 10,000 million in debentures. Canon seeks to meet its liquidity and capital requirements principally
with cash flow from operations and, to a lesser extent, with short-term loans
and long-term debt. Consistent with this objective, Canon continued to reduce
its reliance on external funding for capital investments in favor of relying
upon internally generated cash flows. This approach is supplemented with
group-wide treasury and cash management activities undertaken at the parent
company level. Canon believes that its working capital is sufficient for its
present requirements. To the extent Canon relies on external funding for its liquidity and
capital requirements, it generally has access to various funding sources,
including issuance of additional share capital, long-term debt or short-term
loans. While Canon has been able to obtain funding from its traditional
financing sources and from the capital markets, and believes it will continue
to be able to do so in the future, there can be no assurance that adverse
economic or other conditions will not affect Canons liquidity or long-term
funding in the future. Short-term loans (including the current portions of long-term loans)
amounted to Yen 39,136 million at December 31, 2003, compared to Yen 66,754 million
at December 31, 2002. Long-term debt (excluding their current portions)
amounted to Yen 59,260 million at December 31, 2003, compared to Yen 81,349 million
at December 31, 2002. Substantially all of Canons short-term loans consist of borrowings from
banks under uncommitted lines of credit. Canons long-term debt generally
consists of secured or partially-secured term loans from banks, bearing
interest at floating rates, as well as fixed rate-notes and convertible
debentures which Canon has issued in the domestic market with original
maturities of five to fifteen years. There are no restrictions on the use of
any borrowings. In order to facilitate access to global capital markets, Canon obtains
credit ratings from two rating agencies, Moodys Investors Services, Inc.
(Moodys) and Standard and Poors Rating Services (S&P). In addition, Canon
maintains a rating from Rating and Investment Information, Inc. (R&I), a
rating agency in Japan, for access to the Japanese capital markets. As
of April 30, 2004, Canons debt ratings are: Moodys: Aa3 (long-term);
S&P: AA (long-term, outlook: stable), A-1+ (short-term); and R&I: AA+
(long-term). Canon does not have any rating downgrade triggers that would
accelerate the maturity of a material amount of its debt. A downgrade in
Canons credit ratings or outlook could, however, increase the cost of its
borrowings. 
 Capital resources Capital expenditures in fiscal 2003 amounted to Yen 210,038 million, compared
with Yen 198,702 million in fiscal 2002 and Yen 207,674 million in fiscal 2001. In
fiscal 2003, capital expenditures were mainly used for next-generation new
technology devices for aligners and steppers, construction of facilities by the
Companys consolidated subsidiaries, and expansion of production capabilities
in Japan and overseas. In addition, Canon has been continually investing in
tools and dies for business machines, in which the amount invested is generally
the same each year. For fiscal 2004, Canon projects its capital expenditures
will be approximately Yen 300,000 million. The capital expenditures include an
investment in a new production engineering base and new technology development
center in Kanagawa, Japan. 34




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Employer contributions to Canons worldwide defined benefit pension plans
were Yen 29,944 million in fiscal 2003, Yen 33,661 million in fiscal 2002 and Yen
89,626 million in fiscal 2001. Employer contributions were greater in fiscal
2001 because they included an additional trust fund of cash and equity
securities in the amount of Yen 58,954 million in addition to typical employer
contributions. During fiscal 2004, Canon expects to make cash contributions of
approximately Yen 40,044 million to its domestic defined benefit pension plans,
which would be an increase of 34.0% from Yen 29,879 million in fiscal 2003. This
expected increase is primarily the result of an anticipated increase in the
Companys cash contributions to replenish the shortage of a reserve for the
Companys pension. Working capital in fiscal 2003 increased Yen 200,340 million, to Yen 1,103,474
million, compared with Yen 903,134 million in fiscal 2002 and Yen 776,111 million
in fiscal 2001. This increase was primarily a result of a decrease in
short-term loans. Canon believes its working capital will be sufficient for its
requirements for the foreseeable future. Canons capital requirements are
primarily dependent on managements business plans regarding the levels and
timing of capital expenditures and investments. The working capital ratio
(ratio of current assets to current liabilities) for fiscal 2003 was 2.33,
compared to 2.13 for fiscal 2002 and 1.91 for fiscal 2001. Return on assets (Net income divided by the average of total assets as of
December 31, 2002 and 2003) increased to 9.0% in fiscal 2003, compared to 6.6%
in fiscal 2002 and 5.9% in fiscal 2001. This increase was due mainly to an
increase in net income. Return on stockholders equity increased to 15.9% in
fiscal 2003, compared with 12.5% in fiscal 2002 and 12.2% in fiscal 2001. Debt to total assets ratio was 3.1%, 5.0% and 10.4% for fiscal 2003, 2002
and 2001, respectively. Canon had short-term loans and long-term debt of Yen
98,396 million in fiscal 2003, Yen 148,103 million in fiscal 2002 and Yen 295,630
million in fiscal 2001. 
 C.   Research and development, patents and licenses, etc. Canon is now in Phase II of its Excellent Global Corporation Plan, which
started in 2001 and will end in 2005. The management plan aims to guide Canon
to the No. 1 position worldwide in all core business areas, to build on its R&D
capabilities and to continually create new businesses and to further strengthen
its financial position. With respect to its R&D goals, Canon formulated as part of its management
plan the Canon Over IP concept, through which Canon intends to connect its
digital products to the Internet and lay the foundations for
Internet-businesses for the future. The Company envisions Canon products and
systems interconnected over networks, as well as a variety of Web services that
expand its business domains while creating new value for customers. Canon has R&D centers worldwide that closely collaborate in their R&D
activities. Some regional R&D centers conduct basic research into technology,
and others apply their expertise to develop new products and businesses. In October 2003, the Company formed a new organization for its R&D
activities, Leading-Edge Technology Development Headquarters, from the former
Canon Research Center and other R&D divisions. Leading-Edge Technology
Development Headquarters aims to create new products for the development of new
business areas. In addition to Leading-Edge Technology Headquarters, the Companys R&D
activities are conducted in the following six organizations:  
    
    Core Technology Development Headquarters (where component
engineering and base technology R&D, such as material engineering,
nanotechnology and production engineering, is conducted)
    
    Platform Technology Development Headquarters (where platform
technology R&D, such as system Large Scale Integration (LSI) chips and
network technology, is conducted)
    
    Device Technology Development Headquarters (where key device R&D,
such as for semiconductor devices, is conducted)
    
    SED Development Headquarters (where Surface-conduction
Electron-emitter Display R&D is conducted)
    
    Ecology Research Center (where solar cell R&D is conducted)
    
    Advanced Materials Research Center (where advanced materials R&D is
conducted) Canon had R&D expenditures of Yen 259,140 million in fiscal 2003, Yen 233,669
million in fiscal 2002 and Yen 218,616 million in fiscal 2001. The ratio of R&D
expenditures to total net sales for the past three years was 8.1%, 7.9% and
7.5%, respectively. Canon seeks to produce new products that are protected by patents and to
set market product standards in order to enhance its market position. The
United States Patent and Trademark Office (USPTO) announced that Canon obtained
the second-greatest number of private sector patents in 2003. This achievement
marks Canons twelfth consecutive year as one of the top three patent-receiving
private-sector organizations. Canon aims to realize production procedures that dramatically reduce the
need for prototypes, in the design process, through the effective utilization
of 3D computer aided design (3D-CAD) systems, in order to accelerate product
development and curtail costs. 35




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D.   Trend information 
 Trend information For Canon, 2004 marks the fourth year of Phase II of its Excellent Global
Corporation Plan (2001-2005), which targets the completion of structural
reforms in 2005. As such, Canon will move forward with several initiatives
designed to ensure that it meets the goals set out in the plan by 2005,
including further efforts to reform its operations, from R&D and production
processes to head-office administrative operations, by simultaneously targeting
improved productivity and the elimination of waste. In the area of development,
Canon will target the further shortening of product-development periods and
improvements in design quality. Canon will also continue to strive to
substantially reduce product development costs by implementing digital trial
production procedures that make it unnecessary to create prototypes. As for
production, Canon will focus its energies on the in-house production of key
components and development of innovative high-efficiency factory automation
equipment to realize even greater cost reductions. With regard to marketing
activities, in addition to promoting marketing reforms through structural
reorganization and strengthening marketing channels, Canon is also working to
expand and strengthen its solutions business and improve its hardware solutions
offerings through greater customization to better meet customer needs. Canon
also views the protection of the environment as an essential part of its
management activities and will continue to develop environmentally-conscious
products and introduce resource-recycling systems while actively expanding its
green procurement and purchasing programs. In the office imaging products market, Canon is gradually moving from
monochrome office imaging products to color office imaging products in response
to market demand. Canons response to this transition will continue to affect
its performance in this market. In the camera market, Canon has experienced a
significant increase in sales of digital cameras due to strong worldwide
demand, which has more than offset the decline in sales of conventional film
cameras. Canons ability to respond to trends in the comparatively young market
for digital cameras will continue to significantly affect the performance of
Canons camera products. Pursuant to the enactment of the new law concerning defined benefit
corporate pension plans in Japan, the Company, on March 1, 2003, obtained from
the Minister of Health, Labor and Welfare an exemption from its obligation to
pay benefits for future employee services related to the substitutional portion
of the Employees Pension Fund which will result in the transfer of the pension
obligation and related assets to the government. The relevant impact is
recognized only on the settlement of the substitutional portion when the
company returns the past benefit obligation to the government (expected to be
sometime in the latter half of 2004). In fiscal 2003, there has been no effect
on Canons consolidated financial statements. The aggregate effect of this
separation will be determined based on the Companys total pension benefits
obligation as of the date the transfer is completed and the amount of plan
assets required to be transferred. Based on the Companys current estimates as
to the total amount of such pension benefits obligation and the amount of plan
assets required to be transferred, management does not presently expect that
this separation will have a significant effect on Canons financial condition
and results of operation. However, the final amount of the impact could be
significantly different depending on any change in the amounts of the pension
benefit obligation or plan assets to be transferred. 
 Forward looking statements The foregoing discussion and other disclosure in this item contains
forward-looking statements that reflect managements current views with respect
to certain future events and financial performance. Actual results may differ
materially from those projected or implied in the forward-looking statements.
Further, certain forward-looking statements are based upon assumptions of
future events that may not prove to be accurate. The following important
factors could cause actual results to differ materially from those projected or
implied in any forward-looking statements: exchange rate fluctuations; the
uncertainty of Canons ability to implement its plans to localize production
and other measures to reduce the impact of exchange rate fluctuations;
uncertainty as to economic condition, in Canons major markets; uncertainty of
continued demand for Canons high-value-added products; uncertainty as to the
recovery of computer and related markets; uncertainty of recovery in demand for
Canons semiconductor production equipment; Canons ability to continue to
develop products and to market products that incorporate new technology on a
timely basis, are competitively priced and achieve market acceptance; the
possibility of losses resulting from foreign currency transactions designed to
reduce financial risks from changes in foreign exchange rates; and inventory
risk due to shifts in market demand. For other trend information, please see Item 5 Operating and Financial
Review and Prospects-A. Operating Results 
 E.   Off-balance sheet arrangements As part of its ongoing business, Canon does not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. 36




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##### Table of Contents



F.   Contractual obligations The following summarizes Canons contractual obligations at December 31, 2003. (Millions of Yen)Payments Due By PeriodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsContractual Obligations:Long-Term DebtCapital Lease Obligations
    
    Yen
    11,267
    
    
    
    5,200
    
    
    
    5,230
    
    
    
    765
    
    
    
    72Other Long-Term Debt
    
    
    84,188
    
    
    
    30,995
    
    
    
    22,420
    
    
    
    30,711
    
    
    
    62Operating Lease Obligations
    
    
    43,430
    
    
    
    11,769
    
    
    
    15,304
    
    
    
    9,055
    
    
    
    7,302Purchase commitments for
Property Plant and Equipment
    
    
    54,947
    
    
    
    54,947
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    Yen
    193,832
    
    
    
    102,911
    
    
    
    42,954
    
    
    
    40,531
    
    
    
    7,436
 Canon provides warranties of generally less than one year against defects
in materials and workmanship on most of its consumer products. A liability for
estimated product warranty related cost is established at the time revenue is
recognized and is included in accrued expenses. Estimates for accrued product
warranty cost are primarily based on historical experience, and are affected by
ongoing product failure rates, specific product class failures outside of the
baseline experience, material usage and service delivery costs incurred in
correcting a product failure. As of December 31, 2003, the accrued product
warranty cost amounted to Yen 10,512 million. At December 31, 2003, Canon had outstanding commitments of approximately Yen
54,947 million to purchase property, plant and equipment for use in the
ordinary course of its business. Canon anticipates that funds needed to fulfill
these commitments will be generated internally through operations. Canons management believes that current financial resources, cash generated
from operations and Canons potential capacity for additional debt and/or
equity financing will be sufficient to fund current and future capital
requirements. 37




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##### Table of Contents



Item 6.   Directors, Senior Management and Employees 
 A.   Directors and senior management Directors and corporate auditors of the Company as of March 31, 2004 and
their respective business experience are listed below. Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Fujio Mitarai
    
    President & C.E.O.
    
    4/1961
    
    Entered the Company(Sept. 23, 1935)
    
    
    
    1/1979
    
    President of Canon U.S.A., Inc.3/1981
    
    Director3/1985
    
    Managing Director1/1989
    
    In charge of HQ administration3/1989
    
    Senior Managing Director3/1993
    
    Executive Vice President9/1995
    
    President & C.E.O.*Yukio Yamashita
    
    Senior Managing Director
    
    3/1962
    
    Entered the Company(May 15, 1939)
    
    (Group Executive of Human
    
    8/1980
    
    President of Canon (UK) Ltd.Resource Management &
    
    3/1991
    
    DirectorOrganization HQ)
    
    1/1996
    
    Group Executive of Human Resource
Management &     Organization HQ*3/1997
    
    Managing Director3/1999
    
    Senior Managing Director*Toshizo Tanaka
    
    Senior Managing Director
    
    4/1964
    
    Entered the Company(Oct. 8, 1940)
    
    (Group Executive of Finance &
    
    1/1992
    
    Deputy Group Executive of
Finance & Accounting HQAccounting HQ)
    
    3/1995
    
    Director4/1995
    
    Group Executive of Finance & Accounting HQ*3/1997
    
    Managing Director3/2001
    
    Senior Managing Director*Kinya Uchida
    
    Senior Managing Director
    
    4/1963
    
    Entered the Company(Nov. 21, 1938)
    
    
    
    6/1987
    
    President of Canon Singapore Pte. Ltd.3/1995
    
    Director4/1995
    
    President of Canon France S.A.3/1999
    
    Managing Director4/1999
    
    President of Canon U.S.A., Inc.*3/2003
    
    Senior Managing Director*Tsuneji Uchida
    
    Senior Managing Director
    
    4/1965
    
    Entered the Company(Oct. 30, 1941)
    
    (Chief Executive of Image
    
    4/1995
    
    Group Executive of Lens Products GroupCommunication Products
    
    3/1997
    
    DirectorOperations HQ)
    
    4/1997
    
    Deputy Chief Executive of Camera Operations HQ/Group     Executive of Photo Products Group4/1999
    
    Chief Executive of Camera Operations HQ7/1999
    
    In charge of promotion of digital photo
business1/2000
    
    In charge of promotion of digital photo home
business1/2001
    
    Chief Executive of Image Communications
Products HQ*3/2001
    
    Managing Director3/2003
    
    Senior Managing Director*Yusuke Emura
    
    Managing Director
    
    4/1967
    
    Entered the Company(Nov. 30, 1944)
    
    (Group Executive of Global
    
    1/1989
    
    Toride plant managerEnvironment Promotion HQ)
    
    3/1993
    
    Director4/1994
    
    Ami plant manager4/1995
    
    Deputy Chief Executive of Office Imaging
Products HQ4/1996
    
    Chief Executive of Office Imaging Products HQ3/1999
    
    Managing Director*4/1999
    
    Group Executive of Production Management HQ1/2002
    
    Group Executive of Global Environment
Promotion HQ*
 38




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##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Nobuyoshi Tanaka
    
    Managing Director
    
    4/1970
    
    Entered the Company(Dec. 23, 1945)
    
    (Group Executive of Corporate
    
    1/1991
    
    Senior General Manager of SemiconductorIntellectual Property & Legal HQ)
    
    
    
    Production Equipment Development Center3/1993
    
    Director4/1993
    
    Chief Executive of Optical Products HQ4/1999
    
    Group Executive of Corporate Intellectual Property &     Legal HQ*3/2001
    
    Managing Director*Junji Ichikawa
    
    Managing Director
    
    4/1965
    
    Entered Shiba Electronics Co., Ltd.(Feb. 9, 1943)
    
    (Group Executive of Production
    
    1/1970
    
    Entered the CompanyManagement HQ)
    
    4/1994
    
    Group Executive of Peripheral Group 13/1997
    
    Director4/1997
    
    Deputy Chief Executive of Peripheral Products HQ4/2000
    
    Chief Executive of Peripheral Products HQ3/2001
    
    Managing Director*4/2003
    
    Group Executive of Production Management HQ*Hajime Tsuruoka
    
    Managing Director
    
    3/1970
    
    Entered Meiji Seika Kaisha Ltd.(July 9, 1943)
    
    
    
    11/1973
    
    Entered the Company4/1995
    
    President of Canon Italia S.p.A.3/1997
    
    Director10/1997
    
    President of Canon Deutschland GmbH3/1999
    
    President of Canon Europa N.V.*3/2001
    
    Managing Director*Akiyoshi Moroe
    
    Managing Director
    
    4/1968
    
    Entered the Company(Sept. 28, 1944)
    
    (Group Executive of General
    
    7/1996
    
    Deputy Group of Executive of Human ResourceAffairs HQ)
    
    
    
    Management & Organization HQ(Group Executive of Information &
    
    3/1999
    
    DirectorCommunications Systems HQ)
    
    4/1999
    
    Group Executive of General Affairs HQ*10/2000
    
    Group Executive of Information & CommunicationsSystems HQ*3/2003
    
    Managing Director*Kunio Watanabe
    
    Managing Director
    
    4/1969
    
    Entered the Company(Oct. 3, 1944)
    
    (Group Executive of Corporate
    
    4/1995
    
    Group Executive of Corporate Strategy &Strategy & Development HQ)
    
    
    
    Development HQ*3/1999
    
    Director3/2003
    
    Managing Director*Ikuo Soma
    
    Managing Director
    
    4/1970
    
    Entered the Company(Aug. 4, 1946)
    
    (Chief Executive of Office
    
    1/1997
    
    Group Executive of Office Imaging Products Group 1Imaging Products HQ)
    
    3/1999
    
    Director4/1999
    
    Chief Executive of Office Imaging Products HQ*/Group     Executive of Office Imaging Products
Group 23/2003
    
    Managing Director*Hironori Yamamoto
    
    Managing Director
    
    4/1969
    
    Entered the Company(Dec. 23, 1943)
    
    (Group Executive of Core
    
    1/1998
    
    Deputy Group Executive of Production Management HQTechnology Development HQ)
    
    3/1999
    
    Director*(Group Executive of Surface-
    
    7/1999
    
    Group Executive of Core Technologyconduction Electron-emitter
    
    
    
    Development HQ*/Deputy Group Executive of DisplayDisplay Development HQ)
    
    
    
    Development HQ(Group Executive of Leading-Edge
    
    4/2001
    
    Group Executive of Display Development HQTechnology Development HQ)
    
    7/2003
    
    Group Executive of Surface-conduction
Electron-emitter     Display Development HQ*10/2003
    
    Group Executive of Leading-Edge Technology     Development HQ*3/2004
    
    Managing Director*
 39




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##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Yoroku Adachi
    
    Director
    
    4/1970
    
    Entered the Company(Jan. 11, 1948)
    
    
    
    3/2001
    
    Chairman of Canon Singapore Pte. Ltd. *Chairman of Canon HongKong Co., Ltd. *Director*4/2003
    
    President of Canon (China) Co., Ltd. *Yasuo Mitsuhashi
    
    Director
    
    4/1974
    
    Entered the Company(Nov. 23, 1949)
    
    (Chief Executive of Peripheral
    
    2/2001
    
    Chief Executive of Chemical Products HQProducts HQ)
    
    3/2001
    
    Director*4/2003
    
    Chief Executive of Peripheral Products HQ*Katsuichi Shimizu
    
    Director
    
    4/1970
    
    Entered the Company(Nov. 13, 1946)
    
    (Chief Executive of Inkjet
    
    4/2001
    
    Deputy Chief Executive of Office Imaging Products HQProducts HQ)
    
    3/2003
    
    Director*4/2003
    
    Chief Executive of Inkjet Products HQ*Ryoichi Bamba
    
    Director
    
    4/1972
    
    Entered the Company(Nov. 25, 1946)
    
    
    
    4/1998
    
    Senior Vice President of Canon U.S.A., Inc.2/2003
    
    Executive Vice President of Canon U.S.A., Inc.*3/2003
    
    Director*Tomonori Iwashita
    
    Director
    
    4/1972
    
    Entered the Company(Jan. 28, 1949)
    
    (Deputy Chief Executive of Image
    
    4/1999
    
    Senior General Manager of Camera Development CenterCommunication Products HQ)
    
    1/2001
    
    Group Executive of Photo Products Group3/2003
    
    Director*4/2003
    
    Deputy Chief Executive of Image
Communication     Products HQ*Toshio Honma
    
    Director
    
    4/1972
    
    Entered the Company(Mar. 10, 1949)
    
    (Group Executive of L Printer
    
    4/2001
    
    Deputy Chief Executive of i Printer Products HQBusiness Promotion HQ*)
    
    3/2003
    
    Director*7/2003
    
    Group Executive
of L Printer Business Promotion HQ*Shigeru Imaiida
    
    Director
    
    4/1972
    
    Entered the Company(Sep. 16, 1948)
    
    (Deputy Grope Executive of
    
    8/1999
    
    Senior General Manager of Production EngineeringProduction Management HQ)
    
    
    
    Center3/2003
    
    Director*4/2003
    
    Deputy Grope Executive of Production Management HQ*Masahiro Ohsawa
    
    Director
    
    4/1971
    
    Entered the Company(May 26, 1947)
    
    (Deputy Group Executive of
    
    7/1997
    
    Vice President of Canon U.S.A., Inc.Finance & Accounting HQ)
    
    2/2003
    
    Senior Vice President of Canon U.S.A., Inc.7/2003
    
    Deputy Group Executive of Finance & Accounting HQ*3/2004
    
    Director*Keijiro Yamazaki
    
    Director
    
    4/1971
    
    Entered the Company(Oct. 14, 1948)
    
    (Deputy Group Executive of
    
    4/1999
    
    General Manager of Human ResourceHuman Resource Management &
    
    
    
    Management & Organization Div.Organization HQ)
    
    1/2000
    
    Deputy Group Executive of Human ResourceManagement & Organization HQ*3/2004
    
    Director*Syunichi Uzawa
    
    Director
    
    8/1978
    
    Entered the Company(Jan. 26, 1949)
    
    (Deputy Group Executive of
    
    1/1998
    
    Senior General Manager of Nano-technologySurface-conduction Electron-
    
    
    
    Research Centeremitter Display Development HQ)
    
    4/2001
    
    Deputy Group Executive of Display Development HQ7/2003
    
    Deputy Group Executive of Surface-conduction
Electron-     emitter Display Development HQ*3/2004
    
    Director*Masaki Nakaoka
    
    Director
    
    4/1975
    
    Entered the Company(Jan. 3, 1950)
    
    (Deputy Group Executive Office
    
    1/1997
    
    Senior General Manager of Office ImagingImaging Products HQ)
    
    
    
    Products Development Center 14/1999
    
    Group Executive of Office Imaging Products Group 14/2001
    
    Deputy Chief Executive of Office Imaging
Products HQ*3/2004
    
    Director*
 40




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##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Toshiyuki Komatsu
    
    Director
    
    4/1972
    
    Entered the Company(Jan. 19, 1950)
    
    (Deputy Group Executive of
    
    1/1998
    
    Senior General Manager of Canon Research CenterLeading-Edge Technology
    
    1/2000
    
    Deputy Group Executive of Core TechnologyDevelopment HQ)
    
    
    
    Development HQ10/2003
    
    Deputy Group Executive of Leading-Edge
Technology     Development HQ*3/2004
    
    Director*Shigeyuki Matsumoto
    
    Director
    
    4/1974
    
    Entered the Company(Nov. 15, 1950)
    
    (Group Executive of Device
    
    1/1999
    
    Senior General Manager of Device Development CenterTechnology Development
    
    1/2002
    
    Group Executive of Device
Technology DevelopmentHeadquarters)
    
    
    
    Headquarters3/2004
    
    Director*Haruhisa Honda
    
    Director
    
    4/1974
    
    Entered the Company(Oct. 14, 1948)
    
    (Deputy Chief Executive of
    
    4/1995
    
    Senior General Manager of Cartridge DevelopmentChemical Products Operations)
    
    
    
    Center4/2003
    
    Deputy Chief Executive of Chemical
Products Operations3/2004
    
    Director*Teruomi Takahashi
    
    Corporate Auditor
    
    9/1971
    
    Entered the Company(June 10, 1943)
    
    
    
    3/1999
    
    Director*4/1999
    
    Chief Executive of Chemical Products HQ4/2001
    
    Chief Executive of i Printer Products HQ4/2003
    
    Chief Executive of Chemical Products HQ3/2004
    
    Corporate Auditor*Kunihiro Nagata
    
    Corporate Auditor
    
    4/1970
    
    Entered the Company(Mar. 16, 1948)
    
    
    
    1/1991
    
    General Manager of Business Machines
Accounting Dept.4/1995
    
    Senior General Manager of Business
Machines     Accounting & Production
Planning Center1/2003
    
    Deputy Group Executive of Corporate
Strategy     Development HQ3/2004
    
    Corporate Auditor*Tadashi Ohe
    
    Corporate Auditor
    
    4/1969
    
    Registration as a lawyer*(May 20, 1944)
    
    
    
    4/1989
    
    Instructor of Judicial Training Institution3/1994
    
    Corporate Auditor, the Company*Tetsuo Yoshizawa
    
    Corporate Auditor
    
    4/1968
    
    Entered The Dai-Ichi Mutual Life Insurance Co.(Sept. 5, 1945)
    
    
    
    4/1991
    
    General Manager of Investment Planning
Division4/1992
    
    General Manager Osaka of General Corporate
Group III4/1995
    
    General Manager of Financing Corporate
Division3/1998
    
    Corporate Auditor, the Company*
 Term All directors and corporate auditors are elected by the general meeting of
shareholders. The term of office of Directors is one year. The current term of all
Directors expires in March 2005. The term of office of Corporate Auditors is
four years. The current term for Mr. Ohe expires in March 2007, while current
terms for Mr. Takahashi, Mr. Nagata and Mr. Yoshizawa, who were newly elected
in the general meeting of shareholders in March 2004, expire in March 2008. Board members and corporate auditors may serve any number of consecutive
terms. There is no arrangement or understanding between any Director or Corporate
Auditor and any major shareholder, customer, supplier or other material
stakeholders in connection with the selection of such Director or corporate
auditor. 41




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##### Table of Contents



Board of Directors and Corporate Auditors The Companys articles of incorporation provide for a board of directors
of not more than 30 members and for not more than four corporate auditors.
Currently the number of board members is 27, and the number of corporate
auditors is four. There is no maximum age limit for members of the board. Board
members and corporate auditors may be removed from office at any time by a
resolution of a general meeting of shareholders. The board of directors has ultimate responsibility for the administration
of the Companys affairs. By resolution, the board of directors designates,
from among its members, representative directors, who have authority
individually to represent the Company generally in the conduct of its affairs. Under the Commercial Code of Japan, board members must refrain from
engaging in any business competing with the Company unless approved by a board
resolution, and no board member may vote on a proposal, arrangement or contract
in which that board member is deemed to be materially interested. The Commercial Code requires a resolution of the board of directors for a
company to acquire or dispose of material assets, to borrow substantial amounts
of money, to employ or discharge important employees such as corporate
officers, and to establish, change or abolish material corporate organizations
such as a branch office. The corporate auditors are not required to be and are not certified public
accountants. At least one of the corporate auditors must be a person who has
not been a board member or employee of the Company or any of its subsidiaries
during the five-year period prior to election as a corporate auditor. After the
conclusion of the ordinary general meeting of shareholders to be held with
respect to the first fiscal year ending on or after May 1, 2005, at least half
of corporate
auditors must be persons who have not been either board members or employees of
the Company or any of its subsidiaries. A corporate auditor may not at the same
time be a board member or an employee of the Company or any of its
subsidiaries. The corporate auditors have the statutory duty of examining the
Companys financial statements and the Companys business reports to be
submitted annually by the board of directors at the general meetings of
shareholders and of reporting their opinions to the shareholders. They also
have the statutory duty of supervising the administration by the board members
of the Companys affairs. They shall participate in the meetings of the board
of directors but are not entitled to vote. The corporate auditors constitute the board of corporate auditors. Under
The Law to Revise Part of the Commercial Code and the Law Regarding
Exceptional Rules of the Commercial Code Concerning Auditing, etc. of Stock
Corporation, the board of corporate auditors has a statutory duty to prepare
and submit its audit report to the board of directors each year. A corporate
auditor may note an opinion in the auditor report if a corporate auditors
opinion is different from the opinion expressed in the audit report. The board
of corporate auditors is empowered to establish audit principles, the method of
examination by corporate auditors of the Companys affairs and financial
position and other matters concerning the performance of the corporate
auditors duties. The Company does not have an audit committee. The amount of remuneration payable to the Companys board members as a
group and that of the Companys corporate auditors as a group in respect of a
fiscal year is subject to approval by a general meeting of shareholders. Within
those authorized amounts, the compensation for each board member and corporate
auditor is determined by the board of directors and a consultation of the
corporate auditors, respectively. The Company does not have a remuneration
committee. 
 B.   Compensation In the fiscal year ended December 31, 2003, the Company paid approximately
Yen 1,390 million, in total to Directors and Corporate Auditors. This amount
includes bonuses but excludes retirement allowances. Directors and Corporate Auditors are not covered by the Companys
retirement program. However, in accordance with customary Japanese business
practices, Directors and Corporate Auditors receive lump-sum retirement
benefits, subject to shareholder approval. The Company paid retirement benefits
aggregating Yen 95 million to two Directors during the fiscal year ended December
31, 2003. The Company does not have a stock option plan for Directors, Corporate
Auditors or any other employees. 
 C.   Board practices See Item 6A Directors and senior management and Item 6B  Compensation. 42




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##### Table of Contents



D.   Employees Following table lists the number of Canons full-time employees as of
December 31, 2003, 2002 and 2001. Total
    
    Japan
    
    Americas
    
    Europe
    
    OthersDecember 31, 2003Business machines
    
    
    68,291
    
    
    
    27,841
    
    
    
    7,801
    
    
    
    9,509
    
    
    
    23,140Cameras
    
    
    15,856
    
    
    
    4,698
    
    
    
    1,318
    
    
    
    1,006
    
    
    
    8,834Optical and other products
    
    
    13,231
    
    
    
    8,473
    
    
    
    927
    
    
    
    630
    
    
    
    3,201Corporate
    
    
    5,189
    
    
    
    4,368
    
    
    
    134
    
    
    
    162
    
    
    
    525Total
    
    
    102,567
    
    
    
    45,380
    
    
    
    10,180
    
    
    
    11,307
    
    
    
    35,700December 31, 2002Business machines
    
    
    67,782
    
    
    
    28,814
    
    
    
    7,856
    
    
    
    10,186
    
    
    
    20,926Cameras
    
    
    13,746
    
    
    
    4,360
    
    
    
    1,140
    
    
    
    1,103
    
    
    
    7,143Optical and other products
    
    
    11,552
    
    
    
    7,038
    
    
    
    1,021
    
    
    
    441
    
    
    
    3,052Corporate
    
    
    4,722
    
    
    
    4,231
    
    
    
    134
    
    
    
    159
    
    
    
    198Total
    
    
    97,802
    
    
    
    44,443
    
    
    
    10,151
    
    
    
    11,889
    
    
    
    31,319December 31, 2001Business machines
    
    
    65,244
    
    
    
    28,944
    
    
    
    10,012
    
    
    
    11,288
    
    
    
    15,000Cameras
    
    
    12,562
    
    
    
    4,314
    
    
    
    412
    
    
    
    1,154
    
    
    
    6,682Optical and other products
    
    
    10,653
    
    
    
    6,893
    
    
    
    351
    
    
    
    305
    
    
    
    3,104Corporate
    
    
    5,161
    
    
    
    4,658
    
    
    
    133
    
    
    
    128
    
    
    
    242Total
    
    
    93,620
    
    
    
    44,809
    
    
    
    10,908
    
    
    
    12,875
    
    
    
    25,028
 There was an increase of approximately 4,800 employees as of the end of
fiscal 2003 as compared to the end of fiscal 2002. This increase is mainly due
to
employment increases in the Asian region to accommodate production increases. Canon had approximately 25,200 temporary employees on average during
fiscal 2003. This number includes seasonal workers as well as temp-staff
employees such as security staff, meal service staff and janitorial staff. The Company and its subsidiaries has its own independent labor union.
Canon has not experienced a labor strike since its establishment. The Company
believes that the relationship between Canon and its labor union is good. 43




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##### Table of Contents



E.   Share ownership 
 E.   Share ownership The following table lists the number of shares owned by the directors and
corporate auditors of the Company as of March 31, 2004. The total is 208,547
shares constituting 0.02% of all outstanding shares. Name
    
    Position
    
    Number of sharesFujio Mitarai
    
    President & C.E.O.
    
    
    57,828Yukio Yamashita
    
    Senior Managing Director
    
    
    10,120Toshizo Tanaka
    
    Senior Managing Director
    
    
    11,668Kinya Uchida
    
    Senior Managing Director
    
    
    14,595Tsuneji Uchida
    
    Senior Managing Director
    
    
    4,200Yusuke Emura
    
    Managing Director
    
    
    10,733Nobuyoshi Tanaka
    
    Managing Director
    
    
    10,555Junji Ichikawa
    
    Managing Director
    
    
    7,931Hajime Tsuruoka
    
    Managing Director
    
    
    5,495Akiyoshi Moroe
    
    Managing Director
    
    
    9,855Kunio Watanabe
    
    Managing Director
    
    
    6,435Ikuo Soma
    
    Managing Director
    
    
    3,300Hironori Yamamoto
    
    Managing Director
    
    
    3,000Yoroku Adachi
    
    Director
    
    
    3,495Yasuo Mitsuhashi
    
    Director
    
    
    2,485Katsuichi Shimizu
    
    Director
    
    
    3,025Ryouichi Bamba
    
    Director
    
    
    2,000Tomonori Iwashita
    
    Director
    
    
    2,000Toshio Honma
    
    Director
    
    
    5,495Shigeru Imaiida
    
    Director
    
    
    1,535Masahiro Osawa
    
    Director
    
    
    2,495Keijiro Yamazaki
    
    Director
    
    
    1,275Shunichi Uzawa
    
    Director
    
    
    1,435Masaki Nakaoka
    
    Director
    
    
    1,000Toshiyuki Komatsu
    
    Director
    
    
    1,100Shigeyuki Matsumoto
    
    Director
    
    
    1,435Haruhisa Honda
    
    Director
    
    
    1,026Teruomi Takahashi
    
    Corporate Auditor
    
    
    6,931Kunihiro Nagata
    
    Corporate Auditor
    
    
    1,000Tadashi Ohe
    
    Corporate Auditor
    
    
    13,100Tetsuo Yoshizawa
    
    Corporate Auditor
    
    
    2,000Total
    
    
    208,547
 The Company and certain of its subsidiaries encourage its employees to
purchase shares of their Common Stock
in the market through an employees stock purchase association. 44




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##### Table of Contents



Item 7.   Major Shareholders and Related Party Transactions 
 A.   Major shareholders The table below shows the number of The Companys shares held by the top
ten holders of the Companys shares and their percentage ownership as of
December 31, 2003: Name of major shareholder
    
    Shares owned
    
    Percentage(In thousands)State Street Bank and Trust Company
    
    
    63,441
    
    
    
    7.2
    %Japan Trustee Services Bank, Ltd.
    
    
    61,301
    
    
    
    7.0
    %(Trust Account)The Dai-Ichi Mutual Life Insurance Co.
    
    
    59,090
    
    
    
    6.7
    %The Master Trust Bank of Japan, Ltd.
    
    
    43,277
    
    
    
    4.9
    %(Trust Account)Mizuho Corporate Bank, Ltd.
    
    
    32,784
    
    
    
    3.7
    %The Chase Manhattan Bank, N.A. London
    
    
    28,297
    
    
    
    3.2
    %Moxley & Co.
    
    
    27,717
    
    
    
    3.2
    %The Chase Manhattan Bank, N.A. London Secs
    
    
    21,366
    
    
    
    2.4
    %Lending Omnibus AccountMellon Bank Treaty Clients Omnibus
    
    
    18,076
    
    
    
    2.1
    %Sompo Japan Insurance Inc.
    
    
    15,273
    
    
    
    1.7
    %
 State Streets percentage ownership increased from 4.6% to 7.2% (exceeding
5%) from December 31, 2002 to December 31, 2003, becoming Canons largest
shareholder. In addition, Japan Trustee Services Bank increased its ownership
from 5.5% to 7.0%. Canons major shareholders do not have different voting rights from other
shareholders. As of December 31, 2003, 21.0% of the outstanding shares of common stock
were held of record by 258 residents of the United States of America. The Company is not directly or indirectly owned or controlled by any other
corporation, by any government, or by any other natural or legal person or
persons severally or jointly. 
 B.   Related party transactions Since the beginning of Canons last full fiscal year, Canon has not
transacted with, nor does Canon currently plan to transact with a related party
(other than certain transactions with subsidiaries of the Company). For
purposes of this paragraph, a related party includes: (a) enterprises that
directly or
indirectly through one or more intermediaries, control or are controlled by, or
are under common control with, Canon; (b) associates; (c) individuals owning,
directly or indirectly, an interest in the voting power of Canon that gives
them significant influence over Canon, and close members of any such
individuals
family; (d) key management personnel, that is, those persons having authority
and responsibility for planning, directing and controlling the activities of
Canon, including directors and senior management of companies and close member
of such individuals families; (e) enterprises in which a substantial interest
in the voting power is owned, directly or indirectly, by any person described
in (c) or (d) or over which such a person is able to exercise significant
influence. This includes enterprises owned by directors or major shareholders
of Canon and enterprises that have a member of key management in common with
Canon. Close members of an individuals family are those that may be expected
to influence, or be influenced by, that person in their dealings with Canon. An
associate is an unconsolidated enterprise in which Canon has a significant
influence or which has significant influence over Canon. Significant influence
over an enterprise is the power to participate in the financial and operating
policy decisions of the enterprise but is less than control over those
policies. Shareholders beneficially owning a 10% interest in the voting power
of the Company are presumed to have a significant influence on Canon. To the Companys knowledge, no person owned a 10% interest in the voting
power of the Company as of March 31, 2004. In the ordinary course of business on an arms length basis, Canon
purchases and sells materials, supplies and services from and to its affiliates
accounted for by the equity method. There are 19 affiliates which are accounted
for by the equity method. Canon does not consider the amounts of the
transactions with the above affiliates to be material to its business. 
 C.   Interests of experts and counsel Not Applicable. 45




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##### Table of Contents



Item 8.   Financial Information 
 A.   Consolidated statements and other financial information 
 Consolidated statements This Annual Report contains consolidated financial statements as of
December 31, 2003 and 2002 and for each of the three years in the period ending
December 31, 2003 prepared in accordance with accounting principles generally
accepted in the United States of America and audited in accordance with
the standards of the Public Company Accounting Oversight Board (United States)
by KPMG AZSA & Co., Independent Registered Public Accounting Firm, and accompanied by an
audit report covering each of the periods. Refer to Item 17, Consolidated Financial Statements and Notes to
Consolidated Financial Statements. 
 Legal proceedings Other than as described below, neither the Company nor its subsidiaries
are involved in any litigation or other legal proceedings that, if determined
adversely to the Company or its subsidiaries, would individually or in the
aggregate have a material adverse effect on the Company or its operations.  
    
    On January 16, 2003, The Dusseldorf District Court in Germany issued
rulings in Canons favor in two patent infringement actions filed by Canon
against Pelikan Hardcopy Deutschland GmbH and Pelikan Hardcopy European
Logistics & Services GmbH (collectively, Pelikan Hardcopy). Pelikan
Hardcopy has appealed the decision.On November 20, 2003, The Dusseldorf District Court in Germany further
issued a ruling in Canons favor in another patent infringement action filed
by Canon against Pelikan Hardcopy. Pelikan Hardcopy has appealed the
decision.
    
    On December 17, 2002, the European Commission instituted an investigation
on the printer and supply market. Canon received a questionnaire in
connection with the investigation on the printer and supply market on
January 3, 2003 and Canon has submitted its response. The investigation
is yet to be closed.
    
    In October 2003, an unannounced investigation was made of Canon by the
Japanese Fair Trade Commission, or the JFTC. The JFTC alleges that Canon
interferes with its remanufacturers sales of printer toner cartridges by
frequently changing the design of color laser printer cartridges for its
printers. This proceeding is still pending.
    
    In November 2003, a former employee of Canon filed a lawsuit against Canon
before the Tokyo District Court, demanding remuneration for his
invention. The former employee claims that the reward he received
for his invention was much less than the reasonable remuneration to which
he should have been entitled under applicable patent law, and that Canon
should pay the difference. While the employee estimates that the
difference could amount to some Yen 45.8 billion in total, he is currently
seeking Yen 1 billion. This case is still pending. 
 Dividend policy Dividends are proposed by the Board of Directors of the Company based on
the year-end non-consolidated financial statements of the Company, and are
approved at the ordinary general meeting of shareholders, which is held in
March of each year. Record holders of the Companys American Depositary
Receipts (ADRs) on the dividends record date are entitled to receive payment
in full of the declared dividend. In addition to annual dividends, by
resolution of the Board of Directors, the Company may declare a cash
distribution as an interim dividend. The record date for the Companys year-end
dividends and for the interim dividends are December 31 and June 30,
respectively. Canon intends to continue providing stable returns of profits to
shareholders, while retaining sufficient internal funds to expand its business
and make the investments necessary to improve its income. However there can be
no assurance as to the particular amounts that would be paid from year to year.
The payment of future dividends will depend on Canons earnings, financial
condition, future earnings prospects and other factors. 
 B.   Significant changes No significant change has occurred since the date of the annual financial
statements. 46




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##### Table of Contents



Item 9.  The Offer and Listing 
 A. Offer and listing details 
 Trading in domestic markets The common stock of the Company has been listed on the Tokyo Stock
Exchange (TSE), the principal stock exchange market in Japan, since 1949, and
is traded on the First Section of the TSE. The shares are also listed on four
other regional markets in Japan. The following table lists the reported high and low sales prices of the
shares on the TSE and the closing highs and lows of the Tokyo Stock Price Index
(TOPIX) and Nikkei Stock Average for the five most recent years. TOPIX is an
index of the market value of stocks listed on the First Section of the TSE.
The Nikkei Stock Average, an index of 225 selected stocks on the First Section of the TSE,
is another widely accepted index. TSE
    
    TOPIX
    
    Nikkei Stock AveragePeriod
    
    (Canon Inc.)
    
    (Reference data)
    
    (Reference data)(Japanese yen)
    
    (Points)
    
    (Japanese yen)High
    
    Low
    
    High
    
    Low
    
    High
    
    Low1999 Year
    
    Yen
    4,200
    
    
    Yen
    2,170
    
    
    
    1,722.41
    
    
    
    1,042.48
    
    
    Yen
    18,934.34
    
    
    Yen
    13,232.742000 Year
    
    
    5,620
    
    
    
    3,400
    
    
    
    1,757.95
    
    
    
    1,238.83
    
    
    
    20,833.21
    
    
    
    13,423.212001 Year
    
    
    5,330
    
    
    
    3,150
    
    
    
    1,441.00
    
    
    
    983.00
    
    
    
    14,529.41
    
    
    
    9,504.412002 1(st) quarter
    
    
    5,010
    
    
    
    4,050
    
    
    
    1,128.36
    
    
    
    921.08
    
    
    
    11,919.30
    
    
    
    9,420.852(nd) quarter
    
    
    5,250
    
    
    
    4,220
    
    
    
    1,144.02
    
    
    
    983.48
    
    
    
    11,979.85
    
    
    
    10,074.563(rd) quarter
    
    
    4,590
    
    
    
    3,660
    
    
    
    1,061.94
    
    
    
    880.57
    
    
    
    10,960.25
    
    
    
    9,075.094(th) quarter
    
    
    4,850
    
    
    
    3,620
    
    
    
    914.95
    
    
    
    807.35
    
    
    
    9,215.56
    
    
    
    8,303.392002 Year
    
    
    5,250
    
    
    
    3,620
    
    
    
    1,144.02
    
    
    
    807.35
    
    
    
    11,979.85
    
    
    
    8,303.392003 1(st) quarter
    
    
    4,730
    
    
    
    3,910
    
    
    
    870.69
    
    
    
    770.62
    
    
    
    8,790.92
    
    
    
    7,862.432(nd) quarter
    
    
    5,820
    
    
    
    4,050
    
    
    
    908.43
    
    
    
    770.46
    
    
    
    9,137.14
    
    
    
    7,607.883(rd) quarter
    
    
    6,210
    
    
    
    5,280
    
    
    
    1,085.64
    
    
    
    904.18
    
    
    
    11,033.32
    
    
    
    9,265.564(th) quarter
    
    
    5,650
    
    
    
    4,620
    
    
    
    1,114.40
    
    
    
    953.19
    
    
    
    11,161.71
    
    
    
    9,614.602003 Year
    
    
    6,210
    
    
    
    3,910
    
    
    
    1,114.40
    
    
    
    770.46
    
    
    
    11,161.71
    
    
    
    7,607.88
 TSE
    
    TOPIX
    
    Nikkei Stock AveragePeriod
    
    (Canon Inc.)
    
    (Reference data)
    
    (Reference data)(Japanese yen)
    
    (Points)
    
    (Japanese yen)High
    
    Low
    
    High
    
    Low
    
    High
    
    Low2003 July
    
    Yen
    6,120
    
    
    Yen
    5,430
    
    
    
    986.65
    
    
    
    904.18
    
    
    Yen
    9,990.95
    
    
    Yen
    9,278.49August
    
    
    5,890
    
    
    
    5,500
    
    
    
    1,012.46
    
    
    
    911.86
    
    
    
    10,362.69
    
    
    
    9,265.56September
    
    
    6,210
    
    
    
    5,280
    
    
    
    1,085.64
    
    
    
    1,007.87
    
    
    
    11,033.32
    
    
    
    10,219.05October
    
    
    5,650
    
    
    
    5,100
    
    
    
    1,114.40
    
    
    
    1,014.44
    
    
    
    11,161.71
    
    
    
    10,335.16November
    
    
    5,550
    
    
    
    4,620
    
    
    
    1,071.53
    
    
    
    953.19
    
    
    
    10,847.97
    
    
    
    9,614.60December
    
    
    5,210
    
    
    
    4,650
    
    
    
    1,043.69
    
    
    
    976.28
    
    
    
    10,676.64
    
    
    
    9,910.562004 January
    
    
    5,620
    
    
    
    4,920
    
    
    
    1,084.56
    
    
    
    1,043.40
    
    
    
    11,103.10
    
    
    
    10,665.15February
    
    
    5,480
    
    
    
    4,970
    
    
    
    1,083.52
    
    
    
    1,017.84
    
    
    
    11,041.92
    
    
    
    10,365.40March
    
    
    5,670
    
    
    
    5,020
    
    
    
    1,189.38
    
    
    
    1,088.73
    
    
    
    11,770.65
    
    
    
    11,162.75April
    
    
    5,810
    
    
    
    5,220
    
    
    
    1,225.97
    
    
    
    1,168.86
    
    
    
    12,163.89
    
    
    
    11,683.42
 47




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Trading in foreign markets The Companys ADRs are listed on the New York Stock Exchange (NYSE) and
the Companys Global Bearer Certificates (GBCs) are listed on the Frankfurt
Stock Exchange. Since the Companys 1969 public offering in the United States of
U.S.$9,000,000 principal amount of its 6 1/2 % Convertible Debentures due 1984,
there has been limited trading in the over-the-counter market in the Companys
ADRs. Since March 16, 1998, each ADR represent one share of the Companys
common stock. The Companys ADSs had been quoted on the National Association of
Securities Dealers Automated Quotation system (NASDAQ) since 1972 under the
symbol CANNY to September 13, 2000. On September 14, 2000, Canon listed its ADSs on the NYSE under the symbol
CAJ. The table below displays historical transition of high and low prices of
our ADSs on NASDAQ and NYSE. NASDAQ
    
    NYSEPeriod
    
    (Canon Inc.)
    
    (Canon Inc.)(U.S. dollars)High
    
    Low
    
    High
    
    Low1999 Year
    
    $
    40.938
    
    
    $
    19.2502000 Year
    
    
    51.750
    
    
    
    33.500
    
    
    $
    46.938
    
    
    $
    31.0002001 Year
    
    
    
    
    
    
    
    
    
    
    42.900
    
    
    
    26.4802002 1(st) quarter
    
    
    
    
    
    
    
    
    
    
    38.400
    
    
    
    30.7502(nd) quarter
    
    
    
    
    
    
    
    
    
    
    40.400
    
    
    
    35.5503(rd) quarter
    
    
    
    
    
    
    
    
    
    
    38.400
    
    
    
    31.8504(th) quarter
    
    
    
    
    
    
    
    
    
    
    39.500
    
    
    
    30.1502002 Year
    
    
    
    
    
    
    
    
    
    
    38.400
    
    
    
    30.1502003 1(st) quarter
    
    
    
    
    
    
    
    
    
    
    39.130
    
    
    
    33.7302(nd) quarter
    
    
    
    
    
    
    
    
    
    
    48.860
    
    
    
    34.4803(rd) quarter
    
    
    
    
    
    
    
    
    
    
    53.000
    
    
    
    45.5504(th) quarter
    
    
    
    
    
    
    
    
    
    
    51.300
    
    
    
    43.3502003 Year
    
    
    
    
    
    
    
    
    
    
    53.000
    
    
    
    33.730
 NASDAQ
    
    NYSEPeriod
    
    (Canon Inc.)
    
    (Canon Inc.)(U.S. dollars)High
    
    Low
    
    High
    
    Low2003 July
    
    
    
    
    
    
    
    
    
    $
    52.120
    
    
    $
    45.550August
    
    
    
    
    
    
    
    
    
    
    49.490
    
    
    
    46.000September
    
    
    
    
    
    
    
    
    
    
    53.000
    
    
    
    47.750October
    
    
    
    
    
    
    
    
    
    
    51.300
    
    
    
    47.490November
    
    
    
    
    
    
    
    
    
    
    50.300
    
    
    
    43.350December
    
    
    
    
    
    
    
    
    
    
    47.990
    
    
    
    43.5502004 January
    
    
    
    
    
    
    
    
    
    
    52.630
    
    
    
    46.700February
    
    
    
    
    
    
    
    
    
    
    51.200
    
    
    
    47.360March
    
    
    
    
    
    
    
    
    
    
    52.250
    
    
    
    46.680April
    
    
    
    
    
    
    
    
    
    
    53.090
    
    
    
    48.550
 The depositary and agent of the ADRs is JPMorgan Chase Bank, located at 1
Chase Manhattan Plaza, New York, N.Y. 10081, U.S.A. Co-ownership shares in a GBCs are listed on the Frankfurt Stock Exchange. 
 B.   Plan of distribution Not applicable. 
 C.   Markets See Item 9A Offer and Listing Details. 48




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Item 10.   Additional Information 
 A.   Share capital Not applicable. 
 B.   Memorandum and articles of association Objects and Purposes in Canon Inc. (the Company)s Articles of Incorporation Objects of the Company provided in Article 2 of the Companys Articles of
Incorporation shall be to engage in the following business:  (1)
    
    Manufacture and sale of optical machineries and instruments of various
kinds.(2)
    
    Manufacture and sale of acoustic, electrical and electronic machineries and
instruments of various kinds.(3)
    
    Manufacture and sale of precision machineries and instruments of various
kinds.(4)
    
    Manufacture and sale of medical machineries and instruments of various
kinds.(5)
    
    Manufacture and sale of general machineries, instruments and equipments of
various kinds.(6)
    
    Manufacture and sale of parts, materials, etc. relative to the products
mentioned in each of the preceding items.(7)
    
    Production and sale of software products.(8)
    
    Telecommunications business, and information service business such as
information processing service business, information providing
service business, etc.(9)
    
    Contracting for telecommunications works, electrical works and machinery
and equipment installation works.(10)
    
    Sale, purchase and leasing of real properties and contracting for
architectural works.(11)
    
    Manpower providing business, property leasing business and travel
business.(12)
    
    Business relative to investigation, analysis of the environment and
purification process of soil, water, etc.(13)
    
    Any and all business relative to each of the preceding items. Provisions Regarding Directors There is no provision in the Companys Articles of Incorporation as to a
Directors power to vote on a proposal, arrangement or contract in which the
Director is materially interested, but, under the Commercial Code of Japan, a
director is required to refrain from voting on such matters at meetings of the
board of directors. The Commercial Code provides that compensation for directors is determined
at a general meeting of shareholders of a company. Within the upper limit
approved by the shareholders meeting, the board of directors will determine
the amount of compensation for each director. The board of directors may, by
its resolution, leave such decision to the discretion of the companys
president. The Commercial Code provides that the incurrence by a company of a
significant loan from a third party should be approved by the companys board
of directors. The Companys Regulations of the Board of Directors have adopted
this policy. There is no mandatory retirement age for the Companys Directors under the
Commercial Code or its Articles of Incorporation. There is no requirement concerning the number of shares an individual must
hold in order to qualify him as a Director of the Company under the Commercial
Code or its Articles of Incorporation. Holding of Shares by Foreign Investors Other than the Japanese unit share system that is described in Rights of
Shareholders  Japanese Unit Share System below, there are no limitations on
the rights of non-residents or foreign shareholders to hold or exercise voting
rights on the Companys shares imposed by the laws of Japan or the Companys
Articles of Incorporation or other constituent documents. Rights of Shareholders Set forth below is information relating to the Companys common stock,
including brief summaries of the relevant provisions of its Articles of
Incorporation and Regulations for Handling of Shares, as currently in effect,
and of the Commercial Code of Japan and related legislation. 49




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General The Companys authorized share capital is 2,000,000,000 shares, of which
881,338,645 shares were issued and outstanding as of December 31, 2003. Under
the Commercial Code, shares must be registered and are transferable by delivery
of share certificates. In order to assert shareholders rights against the
Company, a shareholder must have its name and address registered on its
register of shareholders, in accordance with the Companys Regulations for
Handling of Shares. A holder of shares may choose, at its discretion, to participate in the
central clearing system for share certificates under the Law Concerning Central
Clearing of Share Certificates and Other Securities of Japan. Participating
shareholders must deposit certificates representing all of the shares to be
included in this clearing system with the Japan Securities Depository Center.
If a holder is not a participating institution in the Securities Center, it
must participate through a participating institution, such as a securities
company or bank having a clearing account with the Securities Center. All
shares deposited with the Securities Center will be registered in the name of
the Securities Center on the Companys register of shareholders. Each
participating shareholder will in turn be registered on the Companys register
of beneficial shareholders and be treated in the same way as shareholders
registered on its register of shareholders. For the purpose of transferring
deposited shares, delivery of share certificates is not required. Entry of the
share transfer in the books maintained by the Securities Center for
participating institutions, or in the book maintained by a participating
institution for its customers, has the same effect as delivery of share
certificates. The registered beneficial owners may exercise the rights attached
to the shares, such as voting rights, and will receive dividends (if any) and
notices to shareholders directly from the Company. The shares held by a person
as a registered shareholder and those held by the same person as a registered
beneficial owner are aggregated for these purposes. Beneficial owners may at
any time withdraw their shares from deposit and receive share certificates,
subject to the limitations caused by the Japanese unit share system described
below. The registered beneficial holder of deposited shares underlying the ADSs
is the depositary for the ADSs. Accordingly, holders of ADSs will not be able
to directly assert shareholders rights. Dividends Under the Companys Articles of Incorporation, its financial accounts will
be closed on December 31 of each year and dividends, if any, will be
distributed to shareholders (or pledgees) written or recorded in the register
of shareholders as of the close of business on that date following approval at
its ordinary general meeting of shareholders. In addition, by resolution of the
Board of Directors, the Company may distribute interim dividends to the
shareholders (or pledgees) written or recorded in the register of shareholders
as of June 30 each year. Dividends will be distributed in cash. The Commercial Code provides that, until the aggregate amount of the
Companys legal reserve and additional paid-in capital is at least one-quarter
of
its stated capital, it may not make any distribution of profits by way of
annual cash dividends or interim dividends unless it sets aside in its legal
reserve an amount equal to at least one-tenth of any amount that it pays out as
an appropriation of retained earnings, including any payment by way of annual
or interim dividends and bonuses to directors and corporate auditors. The
Commercial Code will permit the Company to distribute profits by way of
dividends out of the excess of the net assets, on a non-consolidated basis,
over the aggregate of:  (1)
    
    the stated capital;(2)
    
    the additional paid-in capital;(3)
    
    the accumulated legal reserve;(4)
    
    the legal reserve to be set aside in respect of the dividends concerned an
proposed payment by way of appropriation of retained earnings; and(5)
    
    other matters specified in the Implementation Ordinance of the Commercial
Code. In the case of interim dividends, the net assets are calculated by
reference to the non-consolidated balance sheet as at the last closing of the
Companys accounts, but adjusted to reflect (i) any subsequent payment by way
of appropriation of retained earnings and transfer to legal reserve in respect
thereof, (ii) any subsequent transfer of retained earning to stated capital,
(iii) if it has been authorized, pursuant to a resolution of a general meeting
of shareholders, to purchase shares (see Repurchase by the Company of Shares
below) the total amount of the purchase price of such share so authorized by
such resolution that may be paid by the Company and (iv) other matters
specified in the Implementation Ordinance of the Commercial Code. Interim
dividends may not be paid where there is a risk that at the end of the fiscal
year there might not be any excess of net assets over the aggregate of the
amounts referred to in (1) through (5) above. Stock Splits The Commercial Code permits the Company, by resolution of its Board of
Directors, to make stock splits, regardless of the value of net assets (as
appearing in its latest non-consolidated balance sheet) per share. Under the
Commercial Code, when the Company issues new shares in the future, the entire
amount of issue price of those new shares is required to be accounted for as
stated capital, although it may account for an amount not exceeding one-half of
the issue price as additional capital. By resolution of the Companys Board of
Directors, the Company may make a stock split within an amount of stated
capital or by transferring the whole or any part of additional paid-in capital
and legal reserve to stated capital. Under the Commercial Code, by resolution of the Companys Board of
Directors, the Company may increase the authorized shares up to the number
reflecting the rate of stock splits and amend its Articles of Incorporation by
resolution of its Board of Directors to this effect without the approval of a
shareholders meeting. For example, if each share became three shares by way
of a stock split, the Company may increase the authorized shares from the
current 2,000,000,000 shares to 6,000,000,000 shares. 50




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Japanese Unit Share System The Companys Articles of Incorporation provided that 1,000 shares of
common stock constitute one unit. The Commercial Code of Japan permits the
Company, by resolution of its Board of Directors, to reduce the number of
shares which constitutes one unit or abolish the unit share system, and amend
its Articles of Incorporation to this effect without the approval of a
shareholders meeting. In January 2004, the Board of
Directors of the Company
resolved to reduce the number of shares constituting one unit from 1,000 to 100
shares of common stock, and the Articles of Incorporation was amended
accordingly, effective May 6, 2004. Transferability of Shares Representing Less than One Unit. The Company may not issue share certificates for a number of shares not
constituting an integral number of units, except in limited circumstances.
Because the transfer of shares normally requires delivery of the share
certificates for the shares being transferred, shares constituting a fraction
of a unit and for which no share certificates are issued may not be
transferable. Because transfer of ADRs does not require a change in the
ownership of the underlying shares, holders of ADRs evidencing ADSs that
constitute less than one unit of shares are not affected by these restrictions
in their ability to transfer the ADRs.
However, because transfers of less than one unit of the underlying shares are
normally prohibited under the unit share system, the deposit agreement provides
that the right of ADR holders to surrender their ADRs and withdraw the
underlying shares for sale in Japan may only be exercised as to whole units. Right of a Holder of Shares Representing Less than One Unit to Require the
Company to Purchase Its Shares. A holder of shares representing less than one unit may at any time require
the Company to purchase its shares. These shares will be purchased at (a) the
closing price of the shares reported by the Tokyo Stock Exchange on the day
when the request to purchase is made or (b) if no sale takes place on the Tokyo
Stock Exchange on that day, then the price at which sale of shares is effected
on such stock exchange immediately thereafter. In such case, the Company will
request payment of an amount equal to the brokerage commission applicable to
the shares purchased pursuant to its Regulations for Handling of Shares.
However, because holders of ADSs representing less than one unit are not able
to withdraw the underlying shares from deposit, these holders will not be able
to exercise this right as a practical matter. Right of a Holder of Shares Representing Less than One Unit to Purchase from
the Company its Shares up to a Whole Unit. The Articles of Incorporation of the Company provide that a holder of
shares representing less than one unit may require the Company to sell its
shares to such holder so that the holder can raise its fractional ownership to
a whole unit. These shares will be sold at (a) the closing price of the shares
reported by the Tokyo Stock Exchange on the day when the request to sell
becomes effective or (b) if no sale has taken place on the Tokyo Stock Exchange
on that day, then the price at which sale of shares is effected on such stock
exchange immediately thereafter. In such case, the Company will request payment
of an amount equal to the brokerage commission applicable to the shares sold
pursuant to its Regulations for Handling of Shares. Voting Rights of a Holder of Shares Representing Less than One Unit. A holder of shares representing less than one unit cannot exercise any
voting rights pertaining to those shares. In calculating the quorum for various
voting purposes, the aggregate number of shares representing less than one unit
will be excluded from the number of outstanding shares. A holder of shares
representing one or more whole units will have one vote for each whole unit
represented. A holder of shares representing less than one unit does not have any
rights relating to voting, such as the right to participate in a demand for the
resignation of a director, the right to participate in a demand for the
convocation of a general meeting of shareholders and the right to join with
other shareholders to propose an agenda item to be addressed at a general
meeting of shareholders. In addition, a holder of shares constituting less than
one unit does not have the
right to require the Company to issue share certificates for those shares. However, a holder of shares constituting less than one unit has all other
rights of a shareholder in respect of those shares, including the following
rights:  
    
    to receive annual and interim dividends,
    
    to receive shares and/or cash by way of retirement, consolidation,
subdivision, conversion, exchange or transfer of shares, company split or
merger,
    
    to be allotted rights to subscribe for new shares and other securities when such rights are granted to shareholders,
    
    to participate in any distribution of surplus assets upon liquidation,
    
    to institute a representative action by shareholders, and
    
    to demand that a director suspend illegal and certain other acts. Ordinary and Extraordinary General Meeting of Shareholders The Company normally holds its ordinary general meeting of shareholders in
March of each year in Ohta-ku, Tokyo or in a neighbouring area. In addition,
the Company may hold an extraordinary general meeting of shareholders whenever
necessary by giving at least two weeks advance notice. Under the Commercial
Code, notice of any shareholders meeting must be given to each shareholder
having voting rights or, in the case of a non-resident shareholder, to his
resident proxy or mailing address in Japan in accordance with the Companys
Regulations for Handling of Shares, at least two weeks prior to the date of the
meeting. 51




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Voting Rights A shareholder is generally entitled to one vote per one unit of shares as
described in this paragraph and under Japanese Unit Share System above. In
general, under the Commercial Code, a resolution can be adopted at a general
meeting of shareholders by a majority of the shares having voting rights
represented at the meeting. The Commercial Code and the Companys Articles of
Incorporation require a quorum for the election of directors and statutory
auditors of not less than one-third of the total number of outstanding shares
having voting rights. The Companys shareholders are not entitled to cumulative
voting in the election of directors. A corporate shareholder whose outstanding
shares are in turn more than one-quarter directly or indirectly owned by the
Company does not have voting rights. Shareholders may exercise their voting
rights through proxies, provided that those proxies are also shareholders who
have voting rights. Pursuant to the Commercial Code and the Companys Articles of
Incorporation, a quorum of, not less than one-third of the outstanding shares
with voting rights must be present at a shareholders meeting to approve any
material corporate actions such as:  
    
    a reduction of stated capital,
    
    amendment of the articles of incorporation (except amendments which the board of directors are authorized to make under
the Commercial Code as described in Stock Splits and Japanese Unit Share System above),
    
    the removal of a director or corporate auditor,
    
    establishment of a 100% parent-subsidiary relationship by way of share exchange or share transfer,
    
    a dissolution, merger or consolidation,
    
    a corporate separation,
    
    the transfer of the whole or an important part of the Companys business,
    
    the taking over of the whole of the business of any other corporation,
    
    any issuance of new shares at a specially favourable price, bonds
or debentures with warrants to subscribe for new shares withspecially
favourableconditions or warrants to subscribe for new shares
withspecially favourableconditions to persons other than shareholders,
and
    
    release of part of directors or corporate auditors liabilities to their corporation. At least two-thirds of the outstanding shares having voting rights present at the meeting must approve these actions. The voting rights of holders of ADSs are exercised by the depositary based on instructions from those holders. Subscription Rights Holders of shares have no preemptive rights under the Companys Articles
of Incorporation when it issues new shares. Under the Commercial Code, the
board of directors may, however, determine that shareholders be given
subscription rights in connection with a particular issue of new shares. In
this case, such rights must be given on uniform terms to all shareholders as of
a specified record date by at least two weeks prior public notice to
shareholders of the record date. Public or individual notice must be given to
each of these shareholders at least two weeks prior to the date of expiration
of the subscription rights. The Company may issue warrants to subscribe for new shares (hereinafter
referred to as subscription warrants) as warrants on their own or attached to
bonds or debentures to any persons by the resolution of its board of directors.
Holders of shares have no preemptive rights under the Companys Articles of
Incorporation when it issues subscription warrants. Under the Commercial Code,
the board of directors may, however, determine that shareholders be given
subscription rights in connection with a particular issue of subscription
warrants. In the case of an issue of subscription warrants, public or
individual notice must be given to each of the shareholders at least two weeks
prior to the date for payment (or issuance of the subscription rights if such
subscription warrants are issued without consideration). Rights to subscribe for new shares, subscription warrants or rights to
subscribe for subscription warrants, may be transferable or nontransferable by
the board of directors and may be made at or substantially below the market
price of shares. Accordingly, rights offerings can result in substantial
dilution or can result in rights holders not being able to realize the economic
value of those rights for subscription warrants. Liquidation Rights In the event of liquidation, the assets remaining after payment of all
debts, liquidation expenses and taxes will be distributed among the
shareholders in proportion to the number of shares they own. Liability to Further Calls or Assessments All of the Companys currently outstanding shares, including shares
represented by the ADSs, are fully paid and nonassessable. 52




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Transfer Agent Mizuho Trust & Banking Co., Ltd. is the transfer agent for the Companys
shares. Mizuho Trusts office is located at 2-1, Yaesu 1-chome, Chuo-ku, Tokyo,
Japan. Mizuho Trust maintains the Companys register of shareholders and
records transfers of record ownership upon presentation of share certificates. Record Date The close of business on December 31 is the record date for the Companys
year-end dividends, if paid. June 30 is the record date for interim dividends,
if paid. A holder of shares constituting one or more whole units who is
registered as a holder on the Companys register of shareholders at the close
of business as of December 31 is also entitled to exercise shareholders voting
rights at the ordinary general meeting of shareholders with respect to the
fiscal year ending on December 31. In addition, the Company may set a record
date for determining the shareholders entitled to other rights and for other
purposes by giving at least two weeks public notice. The shares generally trade ex-dividend or ex-rights in the Japanese stock
exchanges on the third business day before a record date (or if the record date
is not a business day, the fourth business day prior thereto), for the purpose
of dividends or rights offerings. Repurchase by the Company of Shares Under the Commercial Code, the Company may acquire its shares for any
purposes subject to the authorization of shareholders at an ordinary general
shareholders meeting. In addition, the Company is authorized to purchase its
shares pursuant to a resolution of the board of directors pursuant to its
Articles of Incorporation. The acquisition is subject to the condition that the
aggregate amount of the purchase price must not exceed the amount of the
retained earnings available for dividend payments less the sum of any amount
paid or to be paid by way of appropriation of related earnings and any transfer
of retained earnings to stated capital. In the case of shares listed on a Japanese stock exchange or traded in the
over-the-counter market, acquisition shall be made through the market or by way
of tender offer by the close of the following ordinary general meeting, unless
acquisition of the shares from a specified person is authorized by the approval
of two-thirds of outstanding shares having voting rights present at the
shareholders meeting at which a quorum of at least one-third of the
outstanding shares having voting rights must be present. In addition, the Company may acquire its shares by means of repurchase of
any number of shares constituting less than one unit upon the request of the
holder of those shares, as described under Japanese Unit Share System above. 
 C.   Material contracts All contracts entered into by us during the two years preceding the date
of this annual report were entered into in the ordinary course of business. 
 D.   Exchange controls  (a)     Information with respect to Japanese exchange regulations affecting
the Companys security holders is as follows:The Foreign Exchange and Foreign Trade Law of Japan, as amended and
effective from April 1, 1998, and the cabinet orders and ministerial
ordinances thereunder (the Foreign Exchange Regulations) govern certain
aspects relating to the issuance of securities (including
bonds and bonds with rights for subscription of new shares) by the
Company and the acquisition and holding of such securities by
non-residents of Japan and by foreign investors, as hereinafter
defined.Non-residents of Japan are defined as individuals who are not resident
in Japan and corporations whose principal offices are located
outside Japan. Generally, branches and other offices of Japanese
corporations located outside Japan are regarded as non-residents of
Japan, while branches and other offices located within Japan of
non-resident corporations are regarded as residents of Japan. Foreign
investors are defined to be (i) individuals not resident in Japan, (ii)
corporations which are organized under the laws of foreign
countries or whose principal offices are located outside Japan, (iii)
corporations of which 50% or more of the shares are held by (i) and /
or (ii) above and (iv) corporations in respect of which (a) a majority of
the officers are non-resident individuals or (b) a majority of the
officers having the power to represent the corporation are non-resident
individuals.Issuance of Securities by the Company:Under the Foreign Exchange Regulations, the issue of securities outside
Japan by the Company is, in principle, not subject to a prior
notification requirement, but subject to a post reporting requirement of
the Minister of Finance. Under the Foreign Exchange Regulations as
currently in effect, payments of principal, premium and interest in
respect of securities and any additional amounts payable pursuant to
the terms thereof may in general be paid when made without any
restrictions under the Foreign Exchange Regulations.Acquisition of Shares:In general, the acquisition of shares of stock of a Japanese company
listed on any Japanese stock exchange or traded in any
over-the-counter market in Japan (listed shares) by a non-resident of
Japan from a resident of Japan is not subject to a prior
notification requirement, but subject to a post reporting requirement of
the Minister of Finance by such resident.In the case where a foreign investor intends to acquire listed shares
(whether from a resident or a non-resident of Japan, from another
foreign investor or from or through a designated securities company) and
as a result of such acquisition the number of shares held,
directly or indirectly, by such foreign investor would become 10% or more
of the total outstanding shares of the company, the foreign investor
must generally report such acquisition to the Minister of Finance and
other Ministers having jurisdiction over the business of the subject
company within 15 days from and including the date of such acquisition. In
certain exceptional cases, a prior notification is required in respect
of such acquisition. 53




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Acquisition of Shares upon Exercise of Rights for Subscription of New
Shares:The acquisition by a non-resident of Japan of shares upon exercise of his
rights for subscription of new shares is exempted from the notification
and reporting requirements described under Acquisition of Shares above.Dividends and Proceeds of Sales:Under the Foreign Exchange Regulations currently in effect, dividends
paid on, and the proceeds of sale in Japan of, the shares held by
non-residents of Japan may be converted into any foreign currency and
repatriated abroad. The acquisition of shares by non-resident
shareholders by way of stock splits is not subject to any of the
aforesaid notification requirements.(b)     Reporting of Substantial Shareholdings:The Securities and Exchange Law of Japan requires any person who has
become, beneficially and solely or jointly, a holder of more than 5%
of the total outstanding voting shares of capital stock of a company
listed on any Japanese stock exchange or whose shares are traded on
the over-the-counter market in Japan to file with the relevant Local
Finance Bureau of the Minister of Finance within five business days
a report concerning such share ownership. A similar report must also be
made in respect of any subsequent change of 1% or more in any such
holding. Copies of any such report must also be furnished to the issuer
of such shares and all Japanese stock exchanges on which the shares are
listed or (in the case of over-the-counter shares) the Japan Securities
Dealers Association. For this purpose, shares issuable exercise of
rights for subscription of new shares held by such holder are taken into
account in determining both the size of a holding and a companys total
outstanding share capital. 
 E.   Taxation  1.
    
    Taxation in JapanGenerally, a non-resident of Japan or non-Japanese corporation is subject
to Japanese withholding tax on dividends paid by Japanese corporations.
Stock splits are not subject to Japanese income tax. Due to the 2001
Japanese tax legislation, a conversion of retained earnings or legal
reserve (but, not additional paid-in capital, in general) into stated
capital (whether made in connection with a stock split or otherwise) is no
longer treated as a deemed dividend payment to shareholders for Japanese
tax purposes. Thus, such a conversion does not trigger Japanese
withholding taxation.Pursuant to the new tax convention between the United States and Japan
ratified in March 2004, the withholding tax rate on dividends made by a
Japanese corporation to a United States resident or corporation is 10%, if
the recipients are portfolio investors who does not have a permanent
establishment in Japan and the shares with respect to which such dividends
are paid are not related in-fact to such permanent establishment, and if
they are qualified US residents eligible to enjoy treaty benefits. This
10% Japanese withholding tax rate is applicable effective from July 1,
2004 to dividends declared thereafter. The 15% Japanese withholding tax
rate for under the old tax convention is still applicable to such
dividends declared before July 1, 2004. On the other hand, under the
Japanese Income Tax Law, the temporary rate of Japanese withholding tax
applicable to dividends on the listed shares such as those paid by the
Company to non-resident shareholders is currently 7% which is applicable
for the period from January 1, 2004 to March 31, 2008 (15% rate will
applies thereafter) except for dividends paid to any individual
shareholder who holds 5% or more of the issued shares for which the
applicable rate is 20%. While the treaty rate normally overrides the
domestic rate, due to the so-called preservation doctrine, if the tax rate
under the domestic tax law is lower than that promulgated under the
applicable income tax treaty, then the domestic tax rate is still
applicable. If the domestic tax rate still applies, no treaty application
is required to be filed, consequently.2.
    
    Taxation in the United States The following is a discussion of material U.S. federal income tax
consequences of purchasing, owning and disposing of Canon shares or ADSs,
but
it does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a particular persons decision to
acquire such securities. The discussion applies only if you hold Canon shares
or ADSs as capital assets for U.S. federal income tax purposes and it does not
address special classes of holders, such as:  
    
    certain financial institutions;
    
    insurance companies;
    
    dealers and traders in securities or foreign currencies;
    
    persons holding Canon shares or ADSs as part of a hedge, straddle or
conversion transaction;
    
    persons whose functional currency for U.S. federal income tax purposes
is not the U.S. dollar;
    
    partnerships or other entities classified as partnerships for U.S.
federal income tax purposes;
    
    persons liable for the alternative minimum tax;
    
    tax-exempt organizations;
    
    persons holding Canon shares or ADSs that own or are deemed to own
more than ten percent of any class of Canon stock; or
    
    persons who acquired Canon shares or ADSs pursuant to the exercise of
any employee stock option or otherwise as compensation. 54




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This discussion is based on the Internal Revenue Code of 1986, as amended,
administrative pronouncements, judicial decision and final, temporary and
proposed Treasury regulations, all as currently in effect. These laws are
subject to change, possibly on a retroactive basis. It is also based in part on
representations by the depositary and assumes that each obligation under the
deposit agreement and any related agreement will be performed in accordance
with its terms. Please consult your own tax advisers concerning the U.S.
federal, state, local and foreign tax consequences of purchasing, owning and
disposing of Canon shares or ADSs in your particular circumstances. The discussion below applies to you only if you are a beneficial owner of
Canon shares or ADSs and are, for U.S. federal tax purposes:  
    
    a citizen or resident of the United States;
    
    a corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States or any political
subdivision thereof; or
    
    an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source. In general, if you hold ADSs, you will be treated as the holder of the
underlying shares represented by those ADSs for U.S. federal income tax
purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs
for the underlying shares represented by those ADSs. The U.S. Treasury has expressed concerns that parties to whom ADSs are
released may be taking actions that are inconsistent with the claiming of
foreign tax credits for United States holders of ADSs. Accordingly, the
analysis of the creditability of Japanese taxes described below could be
affected by future actions that may be taken by the U.S. Treasury. Taxation of Distributions Distributions paid on ADSs or shares, to the extent paid out of current or
accumulated earnings and profits, other than certain pro rata distributions
of common shares, as determined under United States federal income tax
principles will be treated as a dividend. The amount of this dividend will
include any
amounts withheld by Canon or its paying agent in respect of Japanese taxes. The
amount of the dividend will be treated as foreign source dividend income
to you and will not be eligible for the dividends received deduction generally
allowed to U.S. corporations under the Code. Such dividends will constitute
passive income for foreign tax credit purposes. Distributions in excess of
current or accumulated earnings and profits will be treated first as a tax
free return of capital to the extent of your basis in the shares and then as
capital gain. Dividends paid in Japanese yen will be included in your income in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the
date of your (or in the case of ADSs, the depositarys) receipt of the
dividend, regardless of whether the payment is in fact converted into U.S.
dollars. If
the dividend is converted into U.S. dollars on the date of receipt, you
generally should not be required to recognize foreign currency gain or loss
in respect of the dividend income. You may have foreign currency gain or loss
if you do not convert the amount of such dividend into U.S. dollars on
the date of its receipt. Japanese taxes withheld from cash dividends on Canon shares or ADSs will
be creditable against your U.S. federal income tax liability, subject to
applicable limitations that may vary depending upon your circumstances. Instead
of claiming a credit, you may, at your election, deduct such Japanese
taxes in computing your taxable income, subject to generally applicable
limitations under U.S. law. You should consult your own tax advisers to
determine whether you are subject to any special rules that limit your ability
to make effective use of foreign tax credits. Sale and Other Disposition of Canon Shares or ADSs For U.S. federal income tax purposes, gain or loss you realize on the sale
or other disposition of Canon shares or ADSs will be capital gain or loss,
and will be long-term capital gain or loss if you held the Canon shares or ADSs
for more than one year. The amount of your gain or loss will be equal
to the difference between your tax basis in the Canon shares or ADSs disposed
of and the amount realized on the disposition. Such gain or loss will
generally
be U.S. source gain or loss for foreign tax credit purposes. Passive Foreign Investment Company Rules Canon believes that it will not be considered a passive foreign
investment company (PFIC) for United States federal income tax purposes for
2003. However, since PFIC status depends upon the composition of Canons income
and assets and the market value of its assets (including, among others,
goodwill and equity investments in less than 25 percent owned entities) from
time to time, there can be no assurance that Canon will not be considered a
PFIC for any other taxable year. If Canon were treated as a PFIC for any
taxable year during which you held Canon shares or ADSs, certain adverse
consequences could apply to you. If Canon were treated as a PFIC for any taxable year, gain recognized by
you on the sale or other disposition of Canon shares or ADSs would be
allocated
ratably over you holding period for such securities. The amounts allocated to
the taxable year of the sale or other disposition and to any year before Canon
became a PFIC would be taxed as ordinary income. The amount allocated to each
other taxable year would be subject to tax at the highest rate in effect
for individuals or corporations, as appropriate, and an interest charge would
be imposed on the tax liability attributable to such allocated amounts.
Further,
any distribution in respect of Canon shares or ADSs in excess of 125 percent
of the average of the annual distributions on such securities received by you
during the preceding three years or your holding period, whichever is shorter,
would be subject to taxation as described above. Certain elections (including
a mark to market election) may be available to you that may mitigate the
adverse consequences resulting from PFIC status. Information Reporting and Backup Withholding Payment of dividends and sales proceeds that are made within the United
States or through certain U.S.-related financial intermediaries generally are
subject to information reporting and to backup withholding unless (i) you
are a corporation or other exempt recipient or (ii) you provide a correct
taxpayer
identification number and certify that no loss of exemption from backup
withholding has occurred. The amount of any backup withholding from a payment to you will be allowed
as a credit against your United States federal income tax liability and may
entitle you to a refund, provided that the required information is furnished to
the Internal Revenue Service. 55




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F.   Dividends and paying agents Not applicable. 
 G.   Statement by experts Not applicable. 
 H.   Documents on display According to the Securities Exchange Act of 1934, as amended, the Company
is subject to the requirements of informational disclosure. The Company files
various reports and other information, including Form 20-F and Annual Reports,
to the Securities Exchange Commission and the New York Stock Exchange. These
reports may be inspected at the following sites. Securities Exchange Commission:
     450 Fifth Street, N.W., Washington D.C. 20549 New York Stock Exchange:
     20 Broad Street, New York, New York 10005 Form 20-F is also available at the Electronic Data Gathering, Analysis,
Retrieval system (EDGAR) website which is maintained by the Securities
Exchange Commission. Securities Exchange Commission Home Page:
     http://www.sec.gov 
 I.   Subsidiary information Not applicable. 
 Item 11.   Quantitative and Qualitative Disclosures About Market Risk 
 Market risk exposures Canon is exposed to market risks, including changes in foreign exchange rates,
interest rates and prices of marketable securities and marketable investments.
In order to hedge the risks of changes in foreign exchange rates and interest
rates, Canon uses derivative financial instruments. 
 Equity price risk Canon holds marketable securities included in current assets for short-term
investment, which consists generally of highly-liquid and low-risk instruments.
Marketable investments included in noncurrent assets are held as longer-term
investments. Canon does not hold marketable securities and investments for
trading purposes. Maturities and fair values of such marketable securities and investments
were as follows at December 31, 2003 and 2002. 2003
    
    2002Cost
    
    Fair value
    
    Cost
    
    Fair value(Millions of yen)Due within one year
    
    Yen
    194
    
    
    Yen
    202
    
    
    Yen
    6,068
    
    
    Yen
    6,190Due after one year through five years
    
    
    1,480
    
    
    
    1,932
    
    
    
    545
    
    
    
    608Due after five years
    
    
    5,951
    
    
    
    6,002
    
    
    
    7,276
    
    
    
    7,051Equity securities
    
    
    7,569
    
    
    
    22,977
    
    
    
    6,457
    
    
    
    8,076Total
    
    Yen
    15,194
    
    
    Yen
    31,113
    
    
    Yen
    20,346
    
    
    Yen
    21,925
 56




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Foreign exchange rate and interest rate risk Canon operates internationally and is therefore exposed to the risk of changes
in foreign exchange rates and interest rates. The Company and certain of its
subsidiaries utilize various derivative financial instruments, principally
foreign exchange contracts and interest rate swaps, to reduce these risks.
Canon assesses the risks of foreign currency exchange and interest rates by
continually monitoring changes in its exposure to these risks and by evaluating
hedging opportunities. Canon does not hold or issue derivative financial
instruments for trading purposes. Canon is also exposed to credit-related
losses in the event of non-performance by counterparties to derivative
financial instruments; however, Canon does not expect that any counterparties
will fail to meet their obligations, because most of the counterparties are
internationally recognized financial institutions and the contracts are
diversified across a number of major financial institutions. The major manufacturing bases of Canon are located in Japan and other
countries in Asia. Sales generated from overseas are mainly denominated in U.S.
dollars or euro. Therefore, Canons international operations expose Canon to
the risk of changes in foreign currency exchange rates. Canon enters into
foreign exchange contracts to manage certain foreign currency exchange
exposures principally from the exchange of U.S. dollars and euro into yen.
These contracts are primarily used to hedge the foreign currency exposure of
forecasted intercompany sales, which are denominated in foreign currencies. In
accordance with Canons policy, a specific portion of foreign currency exposure
resulting from forecasted intercompany sales are hedged using foreign exchange
contracts, which principally mature within three months. The following table provides information about Canons major derivative
financial instruments related to foreign currency exchange transactions
existing at December 31, 2003. All of the foreign exchange contracts described
in the following table have a contractual maturity date in 2004. Millions of yenU.S.$
    
    euro
    
    Others
    
    TotalForwards to sell foreign currencies:Contract amounts
    
    Yen
    232,013
    
    
    
    191,537
    
    
    
    23,993
    
    
    
    447,543Estimated fair value
    
    
    3,623
    
    
    
    (6,287
    )
    
    
    (132
    )
    
    
    (2,796
    )Forwards to buy foreign currencies:Contract amounts
    
    Yen
    11,151
    
    
    
    3,261
    
    
    
    7,972
    
    
    
    22,384Estimated fair value
    
    
    (35
    )
    
    
    (165
    )
    
    
    (941
    )
    
    
    (1,141
    )
 Canons exposure to the market risk of changes in interest rates relates
primarily to its debt obligations. Fixed-rate debt obligations expose Canon to
variability in their fair values due to changes in interest rates. To manage
the variability in fair values caused by interest rate changes, Canon enters
into interest rate swaps when it is determined to be appropriate based on
market conditions. The interest rate swaps change fixed-rate debt obligations
to variable-rate debt obligations by entering into receive-fixed, pay-variable
interest rate swaps. To a lesser extent, Canon has entered into interest rate
swaps that change variable-rate debt obligations to fixed-rate debt
obligations. The hedging relationship between interest rate swaps and hedged
debt obligations is highly effective in achieving offsetting changes in fair
values resulting from interest rate risk. The information about Canons derivative financial instruments and other
financial instruments that are sensitive to changes in interest rates are shown
below. For debt obligations, the table presents principal cash flows by
expected maturity dates and related weighted average interest rates. For
interest rate swaps, the table presents notional principal amounts by expected
maturity dates and weighted average interest rates. Notional principal amounts
are used to calculate the contractual payments to be exchanged under the
contracts. The table presents information for obligations existing at December
31, 2003 and 2002 together with the related weighted average contractual
interest rates at December 31, 2003 and 2002. 57




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##### Table of Contents



Long-term debt (including due within one year) Average
    
    
    
    
    
    Expected maturity dateinterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedrates*
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    fair value(Millions of yen except interest rate data)Year ended
December 31, 2003:Japanese yen notes
    
    
    2.39
    %
    
    Yen
    45,000
    
    
    Yen
    20,000
    
    
    Yen
    5,000
    
    
    
    
    
    
    Yen
    10,000
    
    
    Yen
    10,000
    
    
    
    
    
    
    Yen
    47,076Japanese yen convertible
debentures
    
    
    1.28
    
    
    
    11,734
    
    
    
    
    
    
    
    2,577
    
    
    
    
    
    
    
    
    
    
    
    9,157
    
    
    
    
    
    
    
    38,030Loans, principally
from banks
    
    
    2.88
    
    
    
    38,721
    
    
    
    16,195
    
    
    
    17,180
    
    
    Yen
    2,893
    
    
    
    2,100
    
    
    
    219
    
    
    Yen
    134
    
    
    
    38,594Total
    
    
    
    
    
    Yen
    95,455
    
    
    Yen
    36,195
    
    
    Yen
    24,757
    
    
    Yen
    2,893
    
    
    Yen
    12,100
    
    
    Yen
    19,376
    
    
    Yen
    134
    
    
    Yen
    123,700
 Average
    
    
    
    
    
    Expected maturity dateinterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedrates*
    
    Total
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    fair value(Millions of yen except interest rate data)Year ended
December 31, 2002:Japanese yen notes
    
    
    2.31
    %
    
    Yen
    55,000
    
    
    Yen
    10,000
    
    
    Yen
    20,000
    
    
    Yen
    5,000
    
    
    
    
    
    
    Yen
    10,000
    
    
    Yen
    10,000
    
    
    Yen
    58,043Japanese yen convertible
debentures
    
    
    1.26
    
    
    
    15,031
    
    
    
    
    
    
    
    
    
    
    
    5,149
    
    
    
    
    
    
    
    
    
    
    
    9,882
    
    
    
    44,445Loans, principally
from banks
    
    
    2.09
    
    
    
    30,324
    
    
    
    9,006
    
    
    
    10,944
    
    
    
    6,325
    
    
    Yen
    1,217
    
    
    
    262
    
    
    
    2,570
    
    
    
    30,086Total
    
    
    
    
    
    Yen
    100,355
    
    
    Yen
    19,006
    
    
    Yen
    30,944
    
    
    Yen
    16,474
    
    
    Yen
    1,217
    
    
    Yen
    10,262
    
    
    Yen
    22,452
    
    
    Yen
    132,574
 Note: All long-term debt is
fixed rate except loans, principally from banks which include both fixed and floating rate debt. Interest rate swaps Year ended December 31, 2003: Notional
    
    
    Average
    
    
    
    
    
    
    
    
    
    Expected maturity dateprincipal
    
    
    receive
    
    Average
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedamount
    
    
    rate
    
    pay rate
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    fair value(Millions)
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Millions of yen except
notional principal amount and rate data)euro
    
    
    169
    
    
    
    2.33
    %
    
    
    3.44
    %
    
    Yen
    22,564
    
    
    Yen
    8,480
    
    
    Yen
    8,534
    
    
    Yen
    3,611
    
    
    Yen
    1,939
    
    
    
    
    
    
    
    
    
    
    Yen
    (55
    )
 Year ended December 31, 2002: Notional
    
    
    Average
    
    
    
    
    
    
    
    
    
    Expected maturity dateprincipal
    
    
    receive
    
    Average
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedamount
    
    
    rate
    
    pay rate
    
    Total
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    fair value(Millions)
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Millions of yen except
notional principal amount and rate data)Yen
    
    
    180
    
    
    
    1.48
    %
    
    
    1.39
    %
    
    Yen
    180
    
    
    Yen
    180
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Yen
    1U.S.$
    
    
    467
    
    
    
    1.38
    
    
    
    3.75
    
    
    
    56,019
    
    
    
    6,278
    
    
    Yen
    19,504
    
    
    Yen
    30,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,136
    )euro
    
    
    10
    
    
    
    3.37
    
    
    
    4.09
    
    
    
    1,251
    
    
    
    1,251
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
 58




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Derivative financial instruments designated as fair value hedges
principally relate to interest rate swaps associated with fixed-rate debt
obligations. Changes in fair values of the hedged debt obligations and
derivative instruments designated as fair value hedges of these debt
obligations are recognized in other income (deductions). There is no hedging
ineffectiveness or net gains or losses excluded from the assessment of hedge
effectiveness for fiscal 2003 as the critical terms of the interest rate swaps
match the terms of the hedged debt obligations. Changes in the fair value of foreign exchange contracts designated and
qualifying as cash flow hedges of forecasted intercompany sales are reported in
accumulated other comprehensive income (loss). These amounts are subsequently
reclassified into earnings through other income (deductions) in the same period
as the hedged items affect earnings. Substantially all accumulated other
comprehensive income (loss) at year-end is expected to be recognized in
earnings over the next twelve months. Canon excludes the time value component
of the hedging instruments from the assessment of hedge effectiveness. Canon has entered into certain foreign exchange contracts which do not
meet the hedging criteria of Statement of Financial Accounting Standards No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities and Statement of Financial Accounting Standards No. 138 (SFAS
138), Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133. Canon records these
foreign exchange contracts on the balance sheet at fair value. The changes in
fair values are recorded in earnings immediately. The notional amounts of those
foreign exchange contracts were Yen 408,540 million and Yen 362,276 million at
December 31, 2003 and 2002, respectively. Canon has entered into certain interest rate swap agreements which do not
meet the hedging criteria of SFAS 133 and SFAS 138. Canon records these
interest rate swap agreements on the balance sheet at fair value. The changes
in fair values are recorded in earnings immediately. The notional amount of
those interest rate swap agreements was Yen 57,270 million at December 31,
2002. Canon recognized net losses related to those interest rate swaps in the
amount of Yen 94 million, Yen 1,738 million and Yen 2,521 million for the years
ended December 31, 2003, 2002 and 2001, respectively, and classified such
amount in other income (deductions). 
 Item 12.   Description of Securities Other than Equity Securities Not applicable. 
 PART II 
 Item 13.   Defaults, Dividend Arrearages and Delinquencies None. 
 Item 14.   Material Modifications to the Rights of Security Holders and Use of
Proceeds As a result of amendments to the Japanese Commercial Code which became
effective on October 1, 1982 (the 1982 Amendments), the Deposit Agreement
dated May 1, 1969, which constituted the American Depositary Receipts for
10,000,000 ADSs, each ADS representing five shares, was amended and restated as
of October 1, 1982 (the amended Deposit Agreement). Under the 1982 Amendments, the Company was required to adopt a unit of
shares (tan-i-kabu). At its annual meeting of shareholders held on March 30,
1982, the Company adopted 1,000 shares as one unit, effective from October 1,
1982. Recent amendments to the Japanese Commercial Code abolished the unit share
system called tan-i-kabu as of October 1, 2001, and introduced a new unit
share system called tangen-kabu (together with the 1982 Amendments, the
Amendments). Pursuant to these legal changes, the Company was deemed to have
amended its Articles of Incorporation in October 2001, so that 1,000 shares
constituted one new unit. The Commercial Code permits the Board of Directors to
reduce the number of shares that will constitute a new unit or abolish the new
unit share system entirety by amending the Companys Articles of Incorporation
without approval by shareholders. The Board of Directors of the Company
resolved to reduce the number of shares per unit to 100 shares and its Articles
of Incorporation has been amended accordingly. The number of shares
constituting a new unit may not exceed 1,000 shares or one-two hundredths
(1/200) of the number of all issued shares. Under the unit share system, shareholders have one voting right for each
unit of shares they hold. Shares not constituting a full unit will carry all
shareholders rights except for those relating to voting rights. Pursuant to the Amendments, the Company is deemed to have amended its
Articles of Incorporation so that no share certificates will be issued with
respect to any shares constituting less than one unit. Consequently, no
certificates for shares other than a full unit or an integral multiple thereof
will be issued unless the Company determines that it is necessary to issue such
certificates for protection of the holders of shares constituting less than one
unit. As the transfer of shares normally requires delivery of the relevant
share certificates, any fraction of a unit for which no share certificates are
issued
will not be transferable. A holder of shares constituting less than one unit may at any time require
the Company (through the participating institution in the case of a beneficial
shareholder under the central clearing system) to purchase such shares at the
last selling price of a share as reported by the Tokyo Stock Exchange on the
day when such request is made. Shareholders (including beneficial owners) who own less than one unit of
shares may request that Company sell them a number of shares which, when added
to their less than one unit shares, would equal one unit of shares; provided,
however, that the Company is not obliged to do so if the Company does not own
its own shares in the number which it is requested to sell. A holder of shares constituting less than one unit is entitled as a
shareholder to the rights (i) to receive distribution of dividends of profit or
interest, (ii) to receive shares and/or cash by way of retirement,
consolidation, division, conversion, exchange or transfer of shares, company
split or merger, (iii) to be allotted rights to subscribe for new shares and
other securities when such rights are granted to shareholders; and (iv) to
participate in any distribution of surplus assets upon liquidation. Such holder
cannot exercise any voting rights pertaining to those shares. For calculation
of the quorum for various voting purposes, the aggregate number of shares
constituting less than one unit will be excluded from the number of voting
rights. 59




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##### Table of Contents



As a result of the Amendments, the depositary under the Deposit Agreement
may be unable to deliver share certificates with respect to those shares
otherwise deliverable upon the surrender of ADRs which do not constitute one or
more complete units. In such case, the amended Deposit Agreement provides that
the depositary will promptly advise the holder of the amount of such shares,
deliver to the holder a new ADR evidencing such shares, and notify the holder
of
the additional amount of ADRs which the holder must surrender in order for the
depositary to effect delivery of share certificates for all of shares
represented by the holders ADSs. Effective from March 16, 1998, the Company changed the ratio of ADSs to
shares from five shares to one share. In this regard, four additional ADSs for
each ADS held were distributed to holders of ADS. Existing ADRs remain valid
and do not need to be exchanged for new ones. 
 Item 15.   Controls and Procedures (a)   Evaluation of disclosure controls and procedures. As of December 31, 2003, Canon, under the supervision and with the
participation of the its management, including the chief executive officer and
the chief financial officer, performed an evaluation of the effectiveness of
its disclosure controls and procedures. Canons management necessarily applied
its judgment in assessing the costs and benefits of such controls and
procedures, which by their nature can provide only reasonable assurance
regarding managements control objectives. Based on this evaluation, Canons
chief executive officer and chief financial officer concluded that Canons
disclosure controls and procedures are effective at the reasonable assurance
level for gathering, analyzing and disclosing the information Canon is required
to disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the SECs rules and forms. (d)   Changes in internal controls over financial reporting. There has been no change in Canons internal control over financial
reporting that occurred during the period covered by this annual report that
has materially affected, or is reasonably likely to materially affect, its
internal control over financial reporting. 
 Item 16A.   Audit Committee Financial Expert Canons Board of Directors has determined that Kunihiro Nagata qualifies
as an audit committee financial expert as defined by the rules of the SEC.
Mr. Nagata began his career at Canon in 1970, and since that time has worked in
the field of finance and accounting for nearly thirty years. From 1996 to
1999, Mr. Nagata served as a senior manager of the Accounting Planning &
Administration Division, the division responsible for Canons consolidated
reporting.
Mr. Nagata was elected as one of Canons corporate auditors at an ordinary
general meeting of shareholders held in March 2004. See Item 6.A. for
additional information regarding Mr. Nagata. 
 Item 16B.   Code of Ethics Canon maintains a Canon Group Code of Conduct, or Code of Conduct,
applicable to all executives and employees. The Code of Conduct sets forth
provisions relating to honest and ethical conduct (including the handling of
conflicts of interest), compliance with applicable laws, rules and regulations
and accountability for adherence to the provisions of the Code of Conduct. In
addition, on March 31, 2004, the Board of Directors adopted a Code of Ethics
as a supplement to the Code of Conduct. This Code of Ethics applies to Canons
President and Chief Executive Officer, each member of the Board of Directors
(which includes the Chief Financial Officer) and general managers belonging to
Canons accounting headquarters. The Code of Ethics requires full, fair,
accurate, timely and understandable disclosure in reports and documents that
Canon files with or submits to the SEC and in Canons other communications with
the public, prompt internal reporting of violations of the Code of Conduct or
Code of Ethics, and accountability for adherence to their provisions. Both the
Code of Conduct and the Code of Ethics have been filed as exhibits to this
Annual Report. 60




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##### Table of Contents



Item 16C.   Principal Accountant Fees and Services Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors Canons board of corporate auditors (BoCA) consisting of four members,
including two outside corporate auditors, is responsible for the oversight of
its independent auditors work. The BoCA has established Pre-Approval Policies
and Procedures for Audit and Non-Audit Services, effective as of May 28, 2003.
These policies and procedures govern the BoCAs engagement of Canons external
auditors to render audit or non-audit services. Non-audit services include
audit-related services, tax services and other services, as described in
greater detail below under Fees and Services of KPMG AZSA & Co.  Canon and
any affiliate controlled by Canon directly, indirectly or through one or more
intermediaries must follow these policies and procedures before any engagement
of Canons independent accountants for U.S. securities law reporting purposes 
KPMG AZSA & Co., and its affiliates. The policies and procedures stipulate three means by which audit and
non-audit services may be pre-approved, depending on the content of and the fee
for the services.  
    
    All services provided to Canon necessary to perform an annual or
semi-annual audit or review to comply with the standards of the Public
Company Accounting Oversight Board (United States), in any
jurisdiction, including tax services and accounting consultation
necessary to comply with the standards of the Public Company
Accounting Oversight Board (United States) in those jurisdictions, and
any engagement of an Independent Registered Public Accounting Firm for any audit
or non-audit service involving estimated fees exceeding 10,000,000 yen
per single engagement must be approved by the full BoCA.
    
    Certain other services may be pre-approved under detailed categories
of audit and non-audit services established annually by the BoCA, as
long as those services do not exceed specified maximum yen limits for
aggregate fees relating to each of those categories. Any engagement
of an Independent Registered Public Accounting Firm by these means must be
reported to the BoCA at its next regularly scheduled meeting.
    
    For services that are not covered by the above two means of
pre-approval, the BoCA has delegated pre-approval authority to the
Chairman of the BoCA. Any engagement of an Independent Registered Public
Accounting Firm by the Chairman is required to be reported to the BoCA
at its next regularly scheduled meeting. Additional services may be pre-approved by the BoCA on an individual basis. No services were provided for which pre-approval was waived pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. Fees and Services of KPMG AZSA & Co. The following table discloses the aggregate fees accrued or paid to KPMG
AZSA & Co. for each of the last two fiscal years and briefly describes the
services performed: Year ended
    
    Year endedDecember 31, 2003
    
    December 31, 2002(Millions of yen)Audit fees
    
    Yen
    553
    
    
    Yen
    549Audit-related
fees
    
    
    42
    
    
    
    81Tax fees
    
    
    397
    
    
    
    426All other fees
    
    
    61
    
    
    
    99Total
    
    Yen
    1,053
    
    
    Yen
    1,155
 Audit feesinclude fees billed for professional services rendered for
audits of Canons annual consolidated financial statements, review of
consolidated quarterly financial statements, statutory audits of the Company
and its subsidiaries. Audit-related feesinclude fees billed for assurance and related services
such as due diligence, accounting consultations and audits in connection with
mergers and acquisitions, employee benefit plan audits, internal control
reviews, and consultations concerning financial accounting and reporting
standards. Tax feesinclude fees billed for services related to tax compliance,
including the preparation of tax returns and claims for refund, tax planning
and tax advice, including assistance with tax audits and appeals, advice
related to mergers and acquisitions, tax services for employee benefit plans
and assistance with respect to requests for rulings from tax authorities. All other feesinclude fees billed for services rendered with respect to
consultation, design and implementation relating to Canons reorganization. 61




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##### Table of Contents



PART III 
 Item 17.   Financial Statements Consolidated financial statement of Canon Inc. and Subsidiaries:
    
    Page numberReport of Independent Registered Public Accounting Firm
    
    
    63Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    64Consolidated Statements of Income for the years ended December
31, 2003, 2002 and 2001
    
    
    65Consolidated Statements of Stockholders Equity for the years
ended December 31, 2003, 2002 and 2001
    
    
    66Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
    
    
    67Notes to Consolidated Financial Statements
    
    
    68Schedule:Report of Independent Registered Public Accounting Firm on Schedule
    
    
    63Schedule II Valuation and Qualifying Accounts for the years ended
December 31, 2003, 2002 and 2001
    
    
    103All other schedules are omitted as permitted by the rules and
regulations of the Securities and Exchange Commission as not
applicable.
 62




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##### Table of Contents



Report of Independent
Registered Public Accounting Firm The Board of Directors and Stockholders
Canon Inc.: We have audited the consolidated financial statements (expressed in yen) of
Canon Inc. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. The Companys consolidated financial statements do not disclose certain
information required by Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information. In our
opinion, disclosure of this information is required by accounting principles
generally accepted in the United States of America. In our opinion, except for the omission of the segment information as discussed
in the third paragraph of this report, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Canon Inc. and subsidiaries at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein. /s/ KPMG AZSA & Co.
Tokyo, Japan
January 28, 2004 63




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##### Table of Contents



CANON INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002 Millions of yen2003
    
    2002AssetsCurrent assets:Cash and cash equivalents (note 8)
    
    Yen
    690,298
    
    
    
    521,271Marketable securities (note 3)
    
    
    1,324
    
    
    
    7,255Trade receivables (note 4)
    
    
    539,006
    
    
    
    498,587Inventories (note 5)
    
    
    444,244
    
    
    
    432,251Prepaid expenses and other current assets (note 11)
    
    
    255,905
    
    
    
    245,610Total current assets
    
    
    1,930,777
    
    
    
    1,704,974Noncurrent receivables (note 18)
    
    
    16,543
    
    
    
    20,568Investments (note 3)
    
    
    78,912
    
    
    
    64,037Property, plant and equipment, net (notes 6 and 8)
    
    
    846,433
    
    
    
    830,304Other assets (notes 7, 10 and 11)
    
    
    309,483
    
    
    
    322,823Total assets
    
    Yen
    3,182,148
    
    
    
    2,942,706Liabilities and Stockholders EquityCurrent liabilities:Short-term loans (note 8)
    
    Yen
    39,136
    
    
    
    66,754Trade payables (note 9)
    
    
    391,181
    
    
    
    408,464Income taxes (note 11)
    
    
    83,064
    
    
    
    80,169Accrued expenses (note 18)
    
    
    193,657
    
    
    
    154,621Other current liabilities (note 11)
    
    
    120,265
    
    
    
    91,832Total current liabilities
    
    
    827,303
    
    
    
    801,840Long-term debt, excluding current installments (note 8)
    
    
    59,260
    
    
    
    81,349Accrued pension and severance cost (note 10)
    
    
    238,001
    
    
    
    285,129Other noncurrent liabilities (note 11)
    
    
    30,843
    
    
    
    26,193Total liabilities
    
    
    1,155,407
    
    
    
    1,194,511Minority interests
    
    
    161,196
    
    
    
    156,245Commitments and contingent liabilities (note 18)Stockholders equity:Common stockAuthorized 2,000,000,000 shares;issued 881,338,645 shares in 2003
and 879,136,244 shares in 2002 (notes 8 and 12)
    
    
    168,892
    
    
    
    167,242Additional paid-in capital (notes 8 and 12)
    
    
    396,939
    
    
    
    394,088Legal reserve (note 13)
    
    
    39,998
    
    
    
    38,803Retained earnings (notes 11 and 13)
    
    
    1,410,442
    
    
    
    1,164,445Accumulated other comprehensive income (loss)
(notes 3, 10, 11, 15 and 17)
    
    
    (143,275
    )
    
    
    (166,467
    )Treasury stock, at cost, 1,606,513 shares in 2003 and
1,373,557 shares in 2002
    
    
    (7,451
    )
    
    
    (6,161
    )Total stockholders equity
    
    
    1,865,545
    
    
    
    1,591,950Total liabilities and stockholders equity
    
    Yen
    3,182,148
    
    
    
    2,942,706
 See accompanying notes to consolidated financial statements. 64




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##### Table of Contents



CANON INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2003, 2002 and 2001 Millions of yen2003
    
    2002
    
    2001Net sales
    
    Yen
    3,198,072
    
    
    
    2,940,128
    
    
    
    2,907,573Cost of sales
    
    
    1,589,172
    
    
    
    1,540,097
    
    
    
    1,626,959Gross profit
    
    
    1,608,900
    
    
    
    1,400,031
    
    
    
    1,280,614Selling, general and administrative expenses
    
    
    1,154,476
    
    
    
    1,053,672
    
    
    
    998,775Operating profit
    
    
    454,424
    
    
    
    346,359
    
    
    
    281,839Other income (deductions):Interest and dividend income
    
    
    9,284
    
    
    
    9,198
    
    
    
    9,571Interest expense
    
    
    (4,627
    )
    
    
    (6,788
    )
    
    
    (10,712
    )Other, net
    
    
    (10,911
    )
    
    
    (18,752
    )
    
    
    868(6,254
    )
    
    
    (16,342
    )
    
    
    (273
    )Income before income taxes and minority interests
    
    
    448,170
    
    
    
    330,017
    
    
    
    281,566Income taxes (note 11)
    
    
    162,653
    
    
    
    134,703
    
    
    
    115,154Income before minority interests
    
    
    285,517
    
    
    
    195,314
    
    
    
    166,412Minority interests
    
    
    9,787
    
    
    
    4,577
    
    
    
    2,543Income before cumulative effect of change in accounting principle
    
    
    275,730
    
    
    
    190,737
    
    
    
    163,869Cumulative effect of change in accounting principle, net of tax (note 1(q))
    
    
    
    
    
    
    
    
    
    
    3,692Net income
    
    Yen
    275,730
    
    
    
    190,737
    
    
    
    167,561YenEarnings per share (notes 1(s) and 16):Basic:Income before cumulative effect of change in accounting principle
    
    Yen
    313.81
    
    
    
    217.56
    
    
    
    187.07Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    4.22Net income
    
    Yen
    313.81
    
    
    
    217.56
    
    
    
    191.29Diluted:Income before cumulative effect of change in accounting principle
    
    Yen
    310.75
    
    
    
    214.80
    
    
    
    184.55Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    4.15Net income
    
    Yen
    310.75
    
    
    
    214.80
    
    
    
    188.70
 See accompanying notes to consolidated financial statements. 65




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CANON INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Years ended December 31, 2003, 2002 and 2001 Millions of yen2003
    
    2002
    
    2001Common stock:Balance at beginning of year
    
    Yen
    167,242
    
    
    
    165,287
    
    
    
    164,796Conversion of convertible debt (notes 12 and 14)
    
    
    1,650
    
    
    
    1,955
    
    
    
    491Balance at end of year
    
    
    168,892
    
    
    
    167,242
    
    
    
    165,287Additional paid-in capital:Balance at beginning of year
    
    
    394,088
    
    
    
    392,456
    
    
    
    391,939Conversion of convertible debt and other (notes 12 and 14)
    
    
    1,649
    
    
    
    1,953
    
    
    
    517Share issued for acquisition of minority interest (notes 12 and 14)
    
    
    
    
    
    
    1,052
    
    
    
    Capital transactions by consolidated subsidiaries
    
    
    1,202
    
    
    
    (1,373
    )
    
    
    Balance at end of year
    
    
    396,939
    
    
    
    394,088
    
    
    
    392,456Legal reserve:Balance at beginning of year
    
    
    38,803
    
    
    
    38,330
    
    
    
    35,584Transfers from retained earnings (note 13)
    
    
    1,195
    
    
    
    477
    
    
    
    2,746Other
    
    
    
    
    
    
    (4
    )
    
    
    Balance at end of year
    
    
    39,998
    
    
    
    38,803
    
    
    
    38,330Retained earnings:Balance at beginning of year
    
    
    1,164,445
    
    
    
    997,848
    
    
    
    853,177Net income for the year
    
    
    275,730
    
    
    
    190,737
    
    
    
    167,561Cash dividends (note 13)
    
    
    (28,538
    )
    
    
    (23,663
    )
    
    
    (20,144
    )Transfers to legal reserve (note 13)
    
    
    (1,195
    )
    
    
    (477
    )
    
    
    (2,746
    )Balance at end of year
    
    
    1,410,442
    
    
    
    1,164,445
    
    
    
    997,848Accumulated other comprehensive income (loss) (notes 3, 10, 11, 15 and 17):Balance at beginning of year
    
    
    (166,467
    )
    
    
    (135,168
    )
    
    
    (146,582
    )Other comprehensive income (loss) for the year, net of tax
    
    
    23,192
    
    
    
    (31,299
    )
    
    
    11,414Balance at end of year
    
    
    (143,275
    )
    
    
    (166,467
    )
    
    
    (135,168
    )Treasury stock:Balance at beginning of year
    
    
    (6,161
    )
    
    
    (277
    )
    
    
    Purchase
    
    
    (1,290
    )
    
    
    (5,884
    )
    
    
    (277
    )Balance at end of year
    
    
    (7,451
    )
    
    
    (6,161
    )
    
    
    (277
    )Total stockholders equity
    
    Yen
    1,865,545
    
    
    
    1,591,950
    
    
    
    1,458,476Disclosure of comprehensive income:Net income for the year
    
    Yen
    275,730
    
    
    
    190,737
    
    
    
    167,561Other comprehensive income (loss) for the year, net of tax (note 15)
    
    
    23,192
    
    
    
    (31,299
    )
    
    
    11,414Total comprehensive income for the year
    
    Yen
    298,922
    
    
    
    159,438
    
    
    
    178,975
  See accompanying notes to consolidated financial statements. 66




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CANON INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001 Millions of yen2003
    
    2002
    
    2001Net income
    
    Yen
    275,730
    
    
    
    190,737
    
    
    
    167,561Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    183,604
    
    
    
    165,260
    
    
    
    152,300Loss on disposal of property, plant and equipment
    
    
    12,639
    
    
    
    13,137
    
    
    
    20,323Gain on securities contributed to retirement
benefit trust (notes 3 and 10)
    
    
    
    
    
    
    
    
    
    
    (15,536
    )Deferred income taxes
    
    
    (3,035
    )
    
    
    (1,788
    )
    
    
    2,172(Increase) decrease in trade receivables
    
    
    (36,638
    )
    
    
    (47,077
    )
    
    
    47,844(Increase) decrease in inventories
    
    
    (15,823
    )
    
    
    14,029
    
    
    
    73,858Increase (decrease) in trade payables
    
    
    1,129
    
    
    
    64,040
    
    
    
    (161,157
    )Increase in income taxes
    
    
    3,441
    
    
    
    14,935
    
    
    
    10,561Increase in accrued expenses
    
    
    37,131
    
    
    
    12,901
    
    
    
    2,177Other, net
    
    
    7,471
    
    
    
    22,776
    
    
    
    5,649Net cash provided by operating activities
    
    
    465,649
    
    
    
    448,950
    
    
    
    305,752Cash flows from investing activities:Capital expenditure
    
    
    (210,038
    )
    
    
    (198,702
    )
    
    
    (207,674
    )Proceeds from sale of property,
plant and equipment
    
    
    9,354
    
    
    
    11,971
    
    
    
    10,224Payment for purchase of available-for-sale
securities
    
    
    (249
    )
    
    
    (2,751
    )
    
    
    (9,225
    )Proceeds from sale of available-for-sale securities
    
    
    6,544
    
    
    
    1,099
    
    
    
    9,473Payment for purchase of other investments
    
    
    (24,341
    )
    
    
    (30,331
    )
    
    
    (2,452
    )Other
    
    
    18,782
    
    
    
    (11,506
    )
    
    
    7,062Net cash used in investing activities
    
    
    (199,948
    )
    
    
    (230,220
    )
    
    
    (192,592
    )Cash flows from financing activities (note 14):Proceeds from long-term debt
    
    
    4,132
    
    
    
    10,609
    
    
    
    7,417Repayment of long-term debt
    
    
    (25,301
    )
    
    
    (60,690
    )
    
    
    (40,423
    )Decrease in short-term loans
    
    
    (49,224
    )
    
    
    (101,125
    )
    
    
    (64,292
    )Dividends paid (note 13)
    
    
    (28,538
    )
    
    
    (23,663
    )
    
    
    (20,144
    )Payment for purchase of treasury stock
    
    
    (1,071
    )
    
    
    (5,884
    )
    
    
    (277
    )Other
    
    
    (2,037
    )
    
    
    (2,961
    )
    
    
    (3,509
    )Net cash used in financing activities
    
    
    (102,039
    )
    
    
    (183,714
    )
    
    
    (121,228
    )Effect of exchange rate changes
on cash and cash equivalents
    
    
    5,365
    
    
    
    (19,979
    )
    
    
    20,340Net change in cash and cash equivalents
    
    
    169,027
    
    
    
    15,037
    
    
    
    12,272Cash and cash equivalents at beginning of year
    
    
    521,271
    
    
    
    506,234
    
    
    
    493,962Cash and cash equivalents at end of year
    
    Yen
    690,298
    
    
    
    521,271
    
    
    
    506,234Cash paid during the year for:Interest
    
    Yen
    4,570
    
    
    
    6,890
    
    
    
    10,722Income taxes
    
    
    162,247
    
    
    
    121,556
    
    
    
    102,421
 See accompanying notes to consolidated financial statements. 67




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CANON INC. AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements  (1)
    
    Basis of Presentation and Significant Accounting Policies  (a)
    
    Description of Business The Company and subsidiaries (collectively Canon) is a
high-technology oriented company which operates globally and has
numerous core businesses. Originally a 35mm camera maker, Canon is now
one of the worlds leading manufacturers in other fields, such as
office imaging products (mainly copying machines and digital
multifunction devices), and computer peripherals (mainly laser beam and
inkjet printers). Canons products also include business information
products such as computers, micrographics and calculators. Canons
camera business consists mainly of SLR cameras, compact cameras,
digital cameras and video camcorders. Optical related products include
steppers and aligners used in semiconductor chip production, projection
aligners used in the production of liquid crystal displays (LCDs),
broadcasting lenses and medical equipment. Canons sales in the years
ended December 31, 2003, 2002 and 2001 were distributed as follows:
office imaging products 33%, 35% and 34%, computer peripherals 34%, 36%
and 36%, business information products 4%, 5% and 7%, cameras 20%, 16%
and 13%, and optical and other products 9%, 8% and 10%, respectively.Sales are made principally under the Canon brand name, almost entirely
through sales subsidiaries. These subsidiaries are responsible for
marketing and distribution and primarily sell to retail dealers in
their geographical area. Approximately 73%, 73% and 70% of
consolidated net sales for the years ended December 31, 2003, 2002 and
2001 were generated outside Japan, with 33%, 34% and 34% in the
Americas, 30%, 29% and 27% in Europe, and 10%, 10% and 9% in other
areas, respectively.Canons manufacturing operations are conducted primarily at 18 plants
in Japan and 14 overseas plants which are located in the United States,
Germany, France, Taiwan, China, Malaysia, Thailand and Vietnam.Canon sells laser beam printers on an OEM basis to Hewlett-Packard Co.;
such sales constituted approximately 20%, 21% and 21% of consolidated
net sales for the years ended December 31, 2003, 2002 and 2001,
respectively.(b)
    
    Basis of PresentationThe Company and its domestic subsidiaries maintain their books of
account in conformity with financial accounting standards of Japan.
Foreign subsidiaries maintain their books of account in conformity with
financial accounting standards of the countries of their domicile.The accompanying consolidated financial statements reflect the
adjustments but not recorded in the books of account, which management
believes are necessary to conform them with accounting principles
generally accepted in the United States of America.(c)
    
    Principles of ConsolidationThe consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries after elimination of all
significant intercompany balances and transactions. 68




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) (FIN 46R),
Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights
and accordingly should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities,
which was issued in January 2003. For any variable interest entities
(VIEs) that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling
interests of the VIE initially would be measured at their carrying
amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the carrying
amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE. Canon was required to apply FIN
46R to special-purpose entities in consolidated financial statements as
of December 31, 2003, and to other VIEs in consolidated financial
statements as of March 31, 2004. The adoption of FIN 46R did not have
and is not expected to have a material effect on Canons consolidated
financial position and results of operations.(d)
    
    Cash EquivalentsFor purposes of the statements of cash flows, Canon considers all
highly-liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.(e)
    
    Translation of Foreign CurrenciesForeign currency financial statements have been translated in
accordance with Statement of Financial Accounting Standards No. 52
(SFAS 52), Foreign Currency Translation. Under SFAS 52, assets and
liabilities of the Companys subsidiaries located outside Japan with
functional currencies other than Japanese yen are translated into
Japanese yen at the rates of exchange in effect at the balance sheet
date. Gains and losses resulting from translation of financial
statements are excluded from the consolidated statement of income and
are reported in other comprehensive income (loss). Income and expense
items are translated at the average exchange rates prevailing during
the year. Gains and losses resulting from other foreign currency
transactions are included in other income (deductions).(f)
    
    Marketable Securities and InvestmentsCanon classifies its debt and equity securities into one of three
categories: trading, available-for-sale, or held-to-maturity
securities. Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity securities
are those securities with respect to which Canon has the ability and
intent to hold until maturity. All securities not included in trading
or held-to-maturity are classified as available-for-sale.Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and
are reported as a separate component of other comprehensive income
(loss) until realized. 69




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  A decline in fair value of any available-for-sale or held-to-maturity
security below the amortized cost basis that is deemed to be other than
temporary results in a write-down of the amortized cost basis to fair
value as a new cost basis and the amount of the write-down is included
in earnings.On a continuous basis, but no less frequently than at the end of each
quarter period, Canon evaluates the cost basis of an available-for-sale
security for possible impairment. Factors considered in assessing
whether an indication of other than temporary impairment exists
include: the degree of change in ratio of market prices per share to
book value per share at date of evaluation compared to that at date of
acquisition, the financial condition and prospects of each investee
company, industry conditions in which the investee company operates,
the fair value of an available-for-sale security relative to the cost
basis of the investment, the period of time the fair value of an
available-for-sale security has been below the cost basis of the
investment and other relevant factors.Canon evaluates the cost basis of a held-to-maturity security for
possible impairment by taking into consideration the financial
condition, business prospects and credit worthiness of the issuer.Impairment to be recognized is measured based on the amount by which
the carrying amount of the investment exceeds the fair value of the
investment. Fair value is determined based on quoted market prices,
projected discounted cash flows or other valuation techniques as
appropriate.The cost of a security sold or the amount reclassified out of
accumulated other comprehensive income (loss) into earnings was
determined by the specific identification method.(g)
    
    Allowance for Doubtful ReceivablesCanon recognizes allowance for doubtful receivables to ensure trade and
financing receivables are not overstated due to uncollectibility.
Allowance for doubtful receivables is maintained for all customers
based on a variety of factors, including the length of time receivables
are past due, macroeconomic conditions, significant one-time events and
historical experience. An additional reserve for individual accounts
is recorded when Canon becomes aware of a customers inability to meet
its financial obligations, such as in the case of bankruptcy filings or
deterioration in the customers operating results or financial
position. If circumstances related to customers change, estimates of
the recoverability of receivables would be further adjusted.(h)
    
    InventoriesInventories are stated at the lower of cost or market value. Cost is
determined principally by the average method for domestic inventories
and the first-in, first-out method for overseas inventories.(i)
    
    Investments in Affiliated CompaniesInvestments in 20% to 50% owned affiliates in which Canon has the
ability to exercise significant influence over their operating and
financial policies are stated at their underlying equity value. 70




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Canons share of the net earnings (loss) of companies carried on the
equity method, included in other income (deductions), and dividends
received from those companies for the years ended December 31, 2003,
2002 and 2001 are as follows: Millions of yen2003
    
    2002
    
    2001Net loss
    
    Yen
    (1,124
    )
    
    
    (3,521
    )
    
    
    (1,845
    )Dividends received
    
    
    288
    
    
    
    664
    
    
    
    401
  (j)
    
    Impairment of Long-Lived AssetsCanon adopted Statement of Financial Accounting Standards No. 144
(SFAS 144), Accounting for the Impairment or Disposal of Long-Lived
Assets on January 1, 2002. The adoption of SFAS 144 did not have a
material affect on Canons consolidated financial position and results
of operations.In accordance with SFAS 144, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset.
If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the
consolidated balance sheet and reported at the lower of the carrying
amount or fair value less costs of selling such assets, and are no
longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the consolidated balance
sheet.Prior to the adoption of SFAS 144, Canon accounted for long-lived
assets in accordance with Statement of Financial Accounting Standards
No. 121 (SFAS 121), Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of.(k)
    
    Property, Plant and EquipmentProperty, plant and equipment are stated at cost. Plant and equipment
under capital leases are stated at the present value of minimum lease
payments.Depreciation is calculated by the declining-balance method, except for
some assets which are depreciated by the straight-line method, over the
estimated useful lives of the assets. The depreciation period ranges
from 3 years to 60 years for buildings and 2 years to 20 years for
machinery and equipment. 71




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (l)
    
    Goodwill and Other Intangible AssetsGoodwill represents the excess cost over fair value of assets of
businesses acquired. Canon adopted the provisions of Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and
Other Intangible Assets, as of January 1, 2002. Pursuant to SFAS 142,
goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires
that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS 144.Prior to the adoption of SFAS 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited and
assessed for recoverability by determining whether the amortization of
the goodwill balance over its remaining life could be recovered through
undiscounted future operating cash flows of the acquired operation.
All other intangible assets were amortized on a straight-line basis
over the expected periods to be benefited. The amount of goodwill and
other intangible asset impairment, if any, was measured based on
projected discounted future operating cash flows using a discount rate
reflecting Canons average cost of funds.(m)
    
    Income TaxesCanon accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for
Income Taxes. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.Canon records a valuation allowance to reduce the deferred tax assets
to the amount that is more likely than not to be realized.(n)
    
    Revenue RecognitionCanon generates revenue principally through the sale of consumer
products, equipment, supplies and related services under separate
contractual arrangements for each. Canon recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred and
title and risk of loss have been transferred to the customer, the sales
price is fixed or determinable, and collectibility is probable. 72




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Revenue from sales of consumer products including office imaging
products, computer peripherals, business information products and
cameras is recognized when the products are received by customers based
on the free-on-board destination sales term. Revenue from sales of
optical equipment such as steppers and aligners sold with customer
acceptance provisions related to their functionality is recognized when
the equipment is received by the customer and the specific criteria of
the equipment functionality are successfully tested and demonstrated by
Canon to the customer. Service revenues are derived primarily from
maintenance contracts on our equipment sold to customers and are
recognized over the term of the contracts. A substantial portion of
the office imaging products is sold with service maintenance guarantee
contracts for which the customer typically pays a base service fee plus
a variable amount based on usage. Revenue from service maintenance
spot contracts for time and materials is recognized as the services are
provided. Standard service maintenance fee prices are established
depending on equipment classification and include a cost value for the
estimated services to be performed based on historical experience plus
a profit margin thereon.Canon enters into arrangements with multiple elements, which may
include any combination of products, equipment, installment and
maintenance. Canon allocates revenue to each element based on its
relative fair value if such element meets the criteria for treatment as
a separate unit of accounting as prescribed in the Emerging Issues Task
Force Issue 00-21 (EITF 00-21), Revenue Arrangements with Multiple
Deliverables: 1) a delivered item has value to customers on a
stand-alone basis, 2) there is objective and reliable evidence of fair
value of an undelivered item, and 3) the delivery of the undelivered
item must be probable and controlled by Canon if the arrangement
includes the right of return. The price charged when the element is
sold separately generally determines fair value. Otherwise, revenue is
deferred until the undelivered elements are fulfilled as a single unit
of accounting.EITF 00-21 was effective for revenue arrangements entered into after
June 30, 2003. EITF 00-21 did not have a material effect on our
financial position or results of operations.Canon records estimated reductions to sales at the time of sale for
sales incentive programs including product discounts, customer
promotions and volume-based rebates. Estimated reductions in sales are
based upon historical trends and other known factors at the time of
sale. In addition, Canon provides price protection to reseller
customers, and records reductions to sales for the estimated impact of
price protection when price protections are announced.A liability for the estimated product warranty related cost is
established at the time revenue is recognized and is included in
accrued expenses. Estimates for accrued product warranty cost are
based on historical experience, and are affected by ongoing product
failure rates, specific product class failures outside of the baseline
experience, material usage and service delivery costs incurred in
correcting a product failure.(o)
    
    Research and Development and AdvertisingThe costs of research and development and advertising are expensed as incurred. 73




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (p)
    
    Shipping and Handling CostsShipping and handling costs totaled Yen 40,660 million, Yen 39,170
million and Yen 33,835 million for the years ended December 31, 2003,
2002 and 2001, respectively, and are included in selling, general and
administrative expenses in the consolidated statements of income.(q)
    
    Derivative Financial InstrumentsCanon accounts for its derivative and hedging activities pursuant to
Statement of Financial Accounting Standards No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities and No.
138 (SFAS 138), Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of FASB Statement No. 133.
Both standards establish accounting and reporting standards for
derivative instruments and for hedging activities, and require that an
entity recognize all derivatives as either assets or liabilities in
the balance sheet and measure those instruments at fair value.All derivatives are recognized on the consolidated balance sheet at
fair value. On the date the derivative contract is entered into,
Canon designates the derivative as either a hedge of the fair value of
a recognized asset or liability or of an unrecognized firm commitment
(fair value hedge), a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge), a foreign-currency
fair-value or cash-flow hedge (foreign currency hedge), or a hedge
of a net investment in a foreign operation. Canon formally documents
all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking
various hedge transactions. This process includes linking all
derivatives that are designated as fair-value, cash-flow, or
foreign-currency hedges to specific assets and liabilities on the
consolidated balance sheet or to specific firm commitments or
forecasted transactions. Canon also formally assesses, both at the
hedges inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. When
it is determined that a derivative is not highly effective as a hedge
or that it has ceased to be a highly effective hedge, Canon
discontinues hedge accounting prospectively.Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a fair-value hedge, along with the
loss or gain on the hedged asset or liability or unrecognized firm
commitment of the hedged item that is attributable to the hedged risk
are recorded in earnings. Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a
cash-flow hedge are recorded in other comprehensive income (loss),
until earnings are affected by the variability in cash flows of the
designated hedged item. Changes in the fair value of derivatives that
are highly effective as hedges and that are designated and qualify as
foreign-currency hedges are recorded in either earnings or other
comprehensive income (loss), depending on whether the hedge
transaction is a fair-value hedge or a cash-flow hedge. However, if a
derivative is used as a hedge of a net investment in a foreign
operation, its changes in fair value, to the extent effective as a
hedge, are recorded in the cumulative translation adjustments account
within other comprehensive income (loss). 74




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Canon discontinues hedge accounting prospectively when it is determined
that the derivative is no longer effective in offsetting changes in the
fair value or cash flows of the hedged item, the derivative expires or
is sold, terminated, or exercised, the derivative is dedesignated as a
hedging instrument, because it is unlikely that a forecasted
transaction will occur, a hedged firm commitment no longer meets the
definition of a firm commitment, or management determines that
designation of the derivative as a hedging instrument is no longer
appropriate.When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, Canon
continues to carry the derivative on the consolidated balance sheet at
its fair value, and no longer adjusts the hedged asset or liability for
changes in fair value. The adjustment of the carrying amount of the
hedged asset or liability is accounted for in the same manner as other
components of the carrying amount of that asset or liability. When
hedge accounting is discontinued because the hedged item no longer
meets the definition of a firm commitment, Canon continues to carry the
derivative on the consolidated balance sheet at its fair value, removes
any asset or liability that was recorded pursuant to recognition of the
firm commitment from the consolidated balance sheet and recognizes any
gain or loss in earnings. When hedge accounting is discontinued
because it is probable that a forecasted transaction will not occur,
Canon continues to carry the derivative on the consolidated balance
sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income (loss) are recognized immediately in
earnings. In all other situations in which hedge accounting is
discontinued, Canon continues to carry the derivative at its fair value
on the consolidated balance sheet, and recognizes any changes in its
fair value in earnings.Canon also uses certain derivative financial instruments which do not
meet the hedging criteria of SFAS 133 and 138. Canon records these
derivative financial instruments on the consolidated balance sheet at
fair value. The changes in fair values are recorded in earnings
immediately.The cumulative effect adjustment upon the adoption of SFAS 133 and 138
on January 1, 2001 resulted in an increase to net income of
approximately Yen 3,692 million and a decrease to other comprehensive
income (loss) of approximately Yen 2,401 million, which are net of the
related income tax effect of Yen 2,674 million and Yen 1,738 million,
respectively.(r)
    
    Issuance of Stock by Subsidiaries
The change in the Companys proportionate share of subsidiary equity
resulting from issuance of stock by the subsidiaries is accounted for
as an equity transaction.(s)
    
    Earnings per Share
Basic earnings per share have been computed by dividing net income
available to common stockholders by the weighted-average number of
common shares outstanding during each year. Diluted earnings per
share reflect the potential dilution and have been computed on the
basis that all convertible debentures were converted at beginning of
the year or at time of issuance (if later), and that all dilutive
warrants were exercised (less the number of treasury shares assumed to
be purchased from the proceeds using the average market price of the
Companys common shares). 75




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (t)
    
    Use of Estimates
The preparation of the consolidated financial statements requires
management of Canon to make a number of estimates and assumptions
relating to the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the period. Significant items subject to such
estimates and assumptions include valuation allowances for
receivables, inventories and deferred tax assets; impairment of
long-lived assets; environmental liabilities; valuation of derivative
instruments; and assets and obligations related to employee benefits.
Actual results could differ from those estimates.(u)
    
    Environmental Liabilities
Liabilities for environmental remediation and other environmental costs
are accrued when environmental assessments or remedial efforts are
probable and the cost can be reasonably estimated. Such liabilities
are adjusted as further information develops or circumstances change.
Costs of future obligations are not discounted to their present values.(v)
    
    Reclassification
Certain reclassifications have been made to the prior years
consolidated financial statements to conform with the presentation used
for the year ended December 31, 2003.  (2)
    
    Foreign Operations
Amounts included in the consolidated financial statements relating to
subsidiaries operating in foreign countries are summarized as follows: Millions of yen2003
    
    2002
    
    2001Total assets
    
    Yen
    1,339,854
    
    
    
    1,238,800
    
    
    
    1,074,856Net assets
    
    
    564,041
    
    
    
    518,927
    
    
    
    482,986Net sales
    
    
    2,341,221
    
    
    
    2,151,062
    
    
    
    2,048,993Net income
    
    
    74,274
    
    
    
    58,883
    
    
    
    31,903
 76




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (3)
    
    Marketable Securities and Investments
Marketable securities and investments include available-for-sale
securities. The cost, gross unrealized holding gains, gross
unrealized holding losses and fair value for such securities by major
security type at December 31, 2003 and 2002 were as follows: Millions of yenGross
    
    GrossUnrealized
    
    UnrealizedHolding
    
    HoldingCost
    
    Gains
    
    Losses
    
    Fair Value2003:Current:Available-for-sale:Japanese and foreign
governmental bond securities
    
    Yen
    65
    
    
    
    
    
    
    
    4
    
    
    
    61Corporate debt securities
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Bank debt securities
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Fund trusts
    
    
    51
    
    
    
    12
    
    
    
    
    
    
    
    63Equity securities
    
    
    1,044
    
    
    
    78
    
    
    
    
    
    
    
    1,122Yen
    1,238
    
    
    
    90
    
    
    
    4
    
    
    
    1,324Noncurrent:Available-for-sale:Japanese and foreign
governmental bond securities
    
    Yen
    243
    
    
    
    
    
    
    
    5
    
    
    
    238Corporate debt securities
    
    
    5,141
    
    
    
    53
    
    
    
    
    
    
    
    5,194Fund trusts
    
    
    2,047
    
    
    
    455
    
    
    
    
    
    
    
    2,502Equity securities
    
    
    6,525
    
    
    
    15,534
    
    
    
    204
    
    
    
    21,855Yen
    13,956
    
    
    
    16,042
    
    
    
    209
    
    
    
    29,789
 77




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Millions of yenGross
    
    GrossUnrealized
    
    UnrealizedHolding
    
    HoldingCost
    
    Gains
    
    Losses
    
    Fair Value2002:Current:Available-for-sale:Japanese and foreign
governmental bond securities
    
    Yen
    59
    
    
    
    2
    
    
    
    
    
    
    
    61Corporate debt securities
    
    
    5,698
    
    
    
    44
    
    
    
    14
    
    
    
    5,728Bank debt securities
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    91Fund trusts
    
    
    220
    
    
    
    90
    
    
    
    
    
    
    
    310Equity securities
    
    
    1,194
    
    
    
    
    
    
    
    129
    
    
    
    1,065Yen
    7,262
    
    
    
    136
    
    
    
    143
    
    
    
    7,255Noncurrent:Available-for-sale:Japanese and foreign
governmental bond securities
    
    Yen
    220
    
    
    
    7
    
    
    
    
    
    
    
    227Corporate debt securities
    
    
    5,149
    
    
    
    67
    
    
    
    43
    
    
    
    5,173Bank debt securities
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Fund trusts
    
    
    2,302
    
    
    
    
    
    
    
    193
    
    
    
    2,109Equity securities
    
    
    5,263
    
    
    
    2,628
    
    
    
    880
    
    
    
    7,011Yen
    13,084
    
    
    
    2,702
    
    
    
    1,116
    
    
    
    14,670
  Gross unrealized holding losses on available-for-sale securities and the
fair value of the related securities, aggregated by investment category
and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2003, were as follows: Millions of yenLess than 12 months
    
    12 months or longerGross
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    UnrealizedHolding
    
    
    
    
    
    HoldingFair Value
    
    Losses
    
    Fair Value
    
    Losses2003:Current:Available-for-sale:Japanese and foreign
governmental bond securities
    
    Yen
    61
    
    
    
    4
    
    
    
    
    
    
    
    Yen
    61
    
    
    
    4
    
    
    
    
    
    
    
    Noncurrent:Available-for-sale:Japanese and foreign
governmental bond securities
    
    Yen
    238
    
    
    
    5
    
    
    
    
    
    
    
    Equity securities
    
    
    528
    
    
    
    31
    
    
    
    756
    
    
    
    173Yen
    766
    
    
    
    36
    
    
    
    756
    
    
    
    173
 78




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Net unrealized gains on available-for-sale securities, net of related
taxes and minority interests, increased by Yen 7,952 million in the year
ended December 31, 2003, and decreased by Yen 1,732 million and Yen 13,603
million in the years ended December 31, 2002 and 2001, respectively.Maturities of debt securities and fund trust classified as
available-for-sale were as follows at December 31, 2003: Millions of yenCost
    
    Fair ValueDue within one year
    
    Yen
    194
    
    
    
    202Due after one year through five years
    
    
    1,480
    
    
    
    1,932Due after five years
    
    
    5,951
    
    
    
    6,002Yen
    7,625
    
    
    
    8,136
  Proceeds from sale of available-for-sale securities were Yen 6,544
million, Yen 1,099 million and Yen 9,473 million in the years ended
December 31, 2003, 2002 and 2001, respectively.In June 2001, Canon contributed certain marketable equity securities, not
including those of its subsidiaries and affiliated companies, to an
established employee retirement benefit trust, with no cash proceeds
thereon. The fair value of those securities at the time of contribution
was Yen 38,954 million. Upon contribution of those available-for-sale
securities, the net unrealized gains amounting to Yen 15,536 million were
realized and were included in other income (deductions) in the
consolidated statements of income.Realized gains and losses during the years ended December 31, 2003 and
2002 were insignificant.At December 31, 2003, investments include investment in affiliated
companies and non-marketable securities amounting to Yen 24,806 million
and Yen 24,317 million, respectively. At December 31, 2002, investments
include investment in affiliated companies and non-marketable securities
amounting to Yen 30,007 million and Yen 19,360 million, respectively.(4)
    
    Trade Receivables
Trade receivables are summarized as follows: Millions of yen2003
    
    2002Notes
    
    Yen
    28,880
    
    
    
    26,456Accounts
    
    
    524,549
    
    
    
    484,162553,429
    
    
    
    510,618Less allowance for doubtful receivables
    
    
    14,423
    
    
    
    12,031Yen
    539,006
    
    
    
    498,587
 79




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (5)
    
    Inventories
Inventories comprised the following: Millions of yen2003
    
    2002Finished goods
    
    Yen
    305,414
    
    
    
    288,592Work in process
    
    
    124,410
    
    
    
    127,769Raw materials
    
    
    14,420
    
    
    
    15,890Yen
    444,244
    
    
    
    432,251
  (6)
    
    Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and are summarized as follows: Millions of yen2003
    
    2002Land
    
    Yen
    177,953
    
    
    
    167,848Buildings
    
    
    766,398
    
    
    
    743,473Machinery and equipment
    
    
    990,638
    
    
    
    962,037Construction in progress
    
    
    29,627
    
    
    
    34,6401,964,616
    
    
    
    1,907,998Less accumulated depreciation
    
    
    1,118,183
    
    
    
    1,077,694Yen
    846,433
    
    
    
    830,304
  (7)
    
    Goodwill and Other Intangible Assets
The components of acquired intangible assets excluding goodwill at
December 31, 2003 and 2002 were as follows: Millions of yen2003
    
    2002Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationIntangible assets subject to
amortization:Software
    
    Yen
    115,675
    
    
    
    80,534
    
    
    
    106,664
    
    
    
    74,971Other
    
    
    6,188
    
    
    
    3,319
    
    
    
    3,233
    
    
    
    1,106Total
    
    Yen
    121,863
    
    
    
    83,853
    
    
    
    109,897
    
    
    
    76,077
  Intangible assets not subject to amortization at December 31, 2003 and
2002 were insignificant.Aggregate amortization expense for the years ended December 31, 2003, 2002
and 2001 was Yen 12,438 million, Yen 6,288 million and Yen 4,046 million,
respectively. Estimated amortization expense for the next five years
ending December 31 is Yen 12,184 million in 2004, Yen 9,498 million in
2005, Yen 6,974 million in 2006, Yen 3,890 million in 2007, and Yen 1,969
million in 2008. 80




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  The changes in the carrying amount of goodwill for the years ended
December 31, 2003 and 2002 were as follows: Millions of yen2003
    
    2002Balance at beginning of year
    
    Yen
    13,640
    
    
    
    13,375Goodwill acquired during the year
    
    
    7,839
    
    
    
    806Impairment losses
    
    
    
    
    
    
    (503
    )Translation adjustments
    
    
    588
    
    
    
    (38
    )Balance at end of year
    
    Yen
    22,067
    
    
    
    13,640
  In the year ended December 31, 2002, under a continuing negative
trend in the business information industries and semiconductor related
market, the majority of goodwill impairment loss of Yen 503 million was
recognized from the business information products and optical and other
products reporting units since the carrying amounts of the reporting units
were greater than the fair value of the reporting units (as determined
using the expected present value of future cash flows) and the carrying
amounts of the reporting units goodwill exceeded the implied fair value of
that goodwill.Reconciliation of Income before cumulative effect of change in accounting
principle and Earnings per share before cumulative effect of change in
accounting principle to the amounts adjusted for the exclusion of
goodwill amortization for the years ended December 31, 2003, 2002 and 2001
are as follows: Millions of yen2003
    
    2002
    
    2001Income before cumulative effect of change in
accounting principle:Reported income before cumulative effect of
change in accounting principle
    
    Yen
    275,730
    
    
    
    190,737
    
    
    
    163,869Add back: goodwill amortization (net of tax)
    
    
    
    
    
    
    
    
    
    
    968Adjusted income before cumulative effect of
change in accounting principle
    
    Yen
    275,730
    
    
    
    190,737
    
    
    
    164,837YenBasic earnings per share before cumulative
effect of change in accounting principle:Reported income before cumulative effect of
change in accounting principle
    
    Yen
    313.81
    
    
    
    217.56
    
    
    
    187.07Add back: goodwill amortization (net of tax)
    
    
    
    
    
    
    
    
    
    
    1.11Adjusted income before cumulative effect of
change in accounting principle
    
    Yen
    313.81
    
    
    
    217.56
    
    
    
    188.18Diluted earnings per share before cumulative
effect of change in accounting principle:Reported income before cumulative effect of
change in accounting principle:
    
    Yen
    310.75
    
    
    
    214.80
    
    
    
    184.55Add back: goodwill amortization (net of tax)
    
    
    
    
    
    
    
    
    
    
    1.08Adjusted income before cumulative effect of
change in accounting principle
    
    Yen
    310.75
    
    
    
    214.80
    
    
    
    185.63
 81




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (8)
    
    Short-term Loans and Long-term Debt
Short-term loans consisted of the following: Millions of yen2003
    
    2002Bank borrowings
    
    Yen
    2,941
    
    
    
    47,748Long-term debt due within one year
    
    
    36,195
    
    
    
    19,006Yen
    39,136
    
    
    
    66,754
  The weighted average interest rates on short-term loans outstanding
at December 31, 2003 and 2002 were 2.10% and 2.58%, respectively.At December 31, 2003, unused short-term credit facilities for issuance of
commercial paper amounted to Yen 53,565 million.Long-term debt consisted of the following: Millions of yen2003
    
    2002Loans, principally from banks, maturing in
installments through 2030; bearing weighted
average interest of 2.88% and 2.84% at
December 31, 2003 and 2002, respectively,
partially secured by mortgage of property,
plant and equipment
    
    Yen
    27,452
    
    
    
    20,1902-3/10% Japanese yen notes, due 2003
    
    
    
    
    
    
    5,0001-53/100% Japanese yen notes, due 2003
    
    
    
    
    
    
    5,0002-23/40% Japanese yen notes, due 2004
    
    
    10,000
    
    
    
    10,0002-1/40% Japanese yen notes, due 2004
    
    
    10,000
    
    
    
    10,0001-22/25% Japanese yen notes, due 2005
    
    
    5,000
    
    
    
    5,0002-19/20% Japanese yen notes, due 2007
    
    
    10,000
    
    
    
    10,0002-27/100% Japanese yen notes, due 2008
    
    
    10,000
    
    
    
    10,0001-2/10% Japanese yen convertible debentures,
due 2005
    
    
    2,577
    
    
    
    5,1491-3/10% Japanese yen convertible debentures,
due 2008
    
    
    9,157
    
    
    
    9,882Capital lease obligations
    
    
    11,269
    
    
    
    10,13495,455
    
    
    
    100,355Less amount due within one year
    
    
    36,195
    
    
    
    19,006Yen
    59,260
    
    
    
    81,349
 82




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  The aggregate annual maturities of long-term debt outstanding at
December 31, 2003 were as follows: Millions of yen2004
    
    Yen
    36,1952005
    
    
    24,7572006
    
    
    2,8932007
    
    
    12,1002008
    
    
    19,376Later years
    
    
    134Yen
    95,455
  Property, plant and equipment with a book value at December 31, 2003
of Yen 11,358 million were mortgaged to secure loans from banks.As is customary in Japan, both short-term and long-term bank loans are
made under general agreements which provide that security and guarantees
for present and future indebtedness will be given upon request of the
bank, and that the bank shall have the right to offset cash deposits
against obligations that have become due or, in the event of default,
against all obligations due to the bank. Long-term agreements with
lenders other than banks also generally provide that Canon must give
additional security upon request of the lender.The 1-2/10% Japanese yen convertible debentures due 2005 are convertible
into approximately 1,721,000 shares of common stock at a fixed conversion
price of Yen 1,497.00 per share, not less than the fair market value of
the Companys common stock on the date of issuance, at December 31, 2003.
The debentures are redeemable at the option of the Company between January
1, 2004 and December 31, 2004 at premiums of 1%, and at par thereafter,
or, under particular circumstances, at par.The 1-3/10% Japanese yen convertible debentures due 2008 are convertible
into approximately 6,117,000 shares of common stock at a fixed conversion
price of Yen 1,497.00 per share, not less than the fair market value of
the Companys common stock on the date of issuance, at December 31, 2003.
The debentures are redeemable at the option of the Company between January
1, 2004 and December 31, 2007 at premiums ranging from 4% to 1%, and at
par thereafter, or, under particular circumstances, at par.The decrease of convertible debt due to conversion in the years ended
December 31, 2003, 2002 and 2001 were Yen 3,297 million, Yen 3,908 million
and Yen 981 million, respectively. 83




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (9)
    
    Trade Payables
Trade payables are summarized as follows: Millions of yen2003
    
    2002Notes
    
    Yen
    47,771
    
    
    
    62,894Accounts
    
    
    343,410
    
    
    
    345,570Yen
    391,181
    
    
    
    408,464
  (10)
    
    Employee Retirement and Severance Benefits
The Company and certain of its subsidiaries have contributory and
noncontributory defined benefit plans covering substantially all
employees after one year of service. Other subsidiaries sponsor
unfunded retirement and severance plans. Benefits payable under the
plans are based on employee earnings and years of service. The
contributory plans mainly represent the Employees Pension Fund plans
(EPFs), composed of the substitutional portions based on the
pay-related part of the old age pension benefits prescribed by the
Welfare Pension Insurance Law in Japan and the corporate portions
based on contributory defined benefit pension arrangements
established at the discretion of the Company and its subsidiaries.
Management considers that substitutional portions of the EPFs, which
are administered by a board of trustees composed of management and
labor representatives, represent welfare pension plans carried on
behalf of the Japanese government. These contributory and
noncontributory plans are funded in conformity with the funding
requirements of applicable Japanese governmental regulations.In January 2003, the Emerging Issues Task Force reached a final
consensus on Issue 03-2 (EITF 03-2), Accounting for the Transfer
to the Japanese Government of the Substitutional Portion of Employee
Pension Fund Liabilities. EITF 03-2 addresses accounting for a
transfer to the Japanese government of a substitutional portion of an
EPF. EITF 03-2 requires employers to account for the entire
separation process of a substitutional portion from an entire plan
(including a corporate portion) upon completion of the transfer to
the government of the substitutional portion of the benefit
obligation and related plan assets as the culmination of a series of
steps in a single settlement transaction. Under this approach, the
difference between the fair value of the obligation and the assets
required to be transferred to the government should be accounted for
and separately disclosed as a subsidy. In the year ended December
31, 2003, the government approved applications submitted by the
Company and certain of its domestic subsidiaries for an exemption
from the obligation to pay benefits for future employee service
related to the substitutional portion. On January 30, 2004,
management submitted another application for separation of the
remaining substitutional portion (that is, the benefit obligation
related to past services). After Canons applications are approved
by the government, the remaining benefit obligation of the
substitutional portion (that amount earned by past services) as well
as the related government-specified portion of the plan assets of the
EPF will be transferred to the government. Accordingly, there has
been no effect on Canons consolidated financial statements for the
year ended December 31, 2003. The aggregate effect of this
separation will be determined based on the Companys total pension
benefits obligation as of the date the transfer is completed and the
amount of plan assets required to be transferred. Based on the
Companys current estimates as to the total amount of such pension
benefits obligation and the amount of plan assets required to be
transferred, Canons management does not presently expect that this
separation will have a significant effect on Canons financial
condition or results of operation. However, the final amount of the
impact could be significantly different depending on any change in
the amounts of the pension benefit obligation or plan assets to be
transferred. 84




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  In December 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 (revised 2003) (SFAS
132R), Employers Disclosures about Pensions and Other Postretirement
Benefits. SFAS 132R revises and prescribes employers disclosures about
pension plans and other postretirement benefit plans; it does not change
the measurement or recognition of those plans. SFAS 132R retains the
disclosure requirements contained in the original SFAS 132. It also
requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. SFAS 132R is generally effective for fiscal
years ending after December 15, 2003.Net periodic benefit cost included in selling, general and administrative
expenses for Canons employee retirement and severance defined benefit
plans for the years ended December 31, 2003, 2002 and 2001 consisted of
the following components: Millions of yen2003
    
    2002
    
    2001Service cost  benefits earned
during the year
    
    Yen
    29,024
    
    
    
    39,206
    
    
    
    36,553Interest cost on projected
benefit obligation
    
    
    20,806
    
    
    
    19,270
    
    
    
    20,341Expected return on plan assets
    
    
    (13,959
    )
    
    
    (14,523
    )
    
    
    (13,636
    )Net amortization
    
    
    10,636
    
    
    
    11,841
    
    
    
    8,755Yen
    46,507
    
    
    
    55,794
    
    
    
    52,013Weighted-average assumptions:Discount rate
    
    
    2.7
    %
    
    
    2.7
    %
    
    
    2.7
    %Assumed rate of increase in
future compensation levels
    
    
    2.0
    
    
    
    3.4
    
    
    
    3.3Expected long-term rate of return
on plan assets
    
    
    3.6
    
    
    
    3.5
    
    
    
    3.5
 85




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Reconciliations of beginning and ending balances of the benefit
obligations and the fair value of the plan assets are as follows: Millions of yen2003
    
    2002Change in benefit obligations:Benefit obligations at beginning of year
    
    Yen
    766,452
    
    
    
    718,091Service cost
    
    
    29,024
    
    
    
    39,206Interest cost
    
    
    20,806
    
    
    
    19,270Plan participants contributions
    
    
    2,102
    
    
    
    3,825Amendments
    
    
    (52,749
    )
    
    
    Actuarial gain
    
    
    (3,398
    )
    
    
    (1,916
    )Benefits paid
    
    
    (12,484
    )
    
    
    (13,019
    )Other
    
    
    2,637
    
    
    
    995Benefit obligations at end of year
    
    
    752,390
    
    
    
    766,452Change in plan assets:Fair value of plan assets at beginning of year
    
    
    421,642
    
    
    
    429,483Actual return on plan assets
    
    
    31,008
    
    
    
    (33,813
    )Employer contributions
    
    
    29,944
    
    
    
    33,661Plan participants contributions
    
    
    2,102
    
    
    
    3,825Benefits paid
    
    
    (12,484
    )
    
    
    (13,019
    )Other
    
    
    16
    
    
    
    1,505Fair value of plan assets at end of year
    
    
    472,228
    
    
    
    421,642Funded status
    
    
    (280,162
    )
    
    
    (344,810
    )Unrecognized actuarial loss
    
    
    289,991
    
    
    
    329,240Unrecognized prior service cost
    
    
    (99,512
    )
    
    
    (52,773
    )Unrecognized net transition obligation being
recognized over 22 years
    
    
    4,644
    
    
    
    4,988Net amount recognized
    
    Yen
    (85,039
    )
    
    
    (63,355
    )Amounts recognized in the consolidated balance
sheets consist of:Prepaid pension cost
    
    Yen
    2,515
    
    
    
    2,664Accrued pension and severance cost
    
    
    (238,001
    )
    
    
    (285,129
    )Intangible assets
    
    
    86
    
    
    
    144Accumulated other comprehensive income
(loss), gross of tax
    
    
    150,361
    
    
    
    218,966Net amount recognized
    
    Yen
    (85,039
    )
    
    
    (63,355
    )Pension plans with an accumulated benefit
obligation in excess of plan assets:Projected benefit obligation
    
    Yen
    745,781
    
    
    
    709,881Accumulated benefit obligation
    
    
    697,711
    
    
    
    650,339Fair value of plan assets
    
    
    466,970
    
    
    
    369,777
 86




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Information with respect to domestic plans is as follows:Measurement date
The Company and certain of its domestic subsidiaries use a October 1
measurement date for the majority of its plans. AssumptionsWeighted-average assumptions used to determinebenefit
obligations at December 31:
    
    2003
    
    2002Discount rate
    
    
    2.5
    %
    
    
    2.5
    %Assumed rate of increase in future compensation
levels
    
    
    1.9
    
    
    
    3.3
 Weighted-average assumptions used to determinenet periodic
benefit cost for the years ended December 31:
    
    2003
    
    2002
    
    2001Discount rate
    
    
    2.5
    %
    
    
    2.5
    %
    
    
    3.0
    %Assumed rate of increase in future
compensation levels
    
    
    3.3
    
    
    
    3.3
    
    
    
    2.1Expected long-term rate of return on domestic
plan assets
    
    
    3.1
    
    
    
    3.0
    
    
    
    4.0
  Canon determines the expected long-term rate of return based on the
expected long-term return of the various asset categories in which it
invests. Canon considers the current expectations for future returns and
the actual historical returns of each plan asset category.Obligations
The accumulated benefit obligation for all domestic defined benefit plans
was Yen 647,447 million and Yen 652,416 million at December 31, 2003 and
2002, respectively.Plan assets
Canons domestic benefit plan weighted-average asset allocations at
December 31, 2003 and 2002 by asset category are as follows: Asset Category
    
    2003
    
    2002Equity securities
    
    
    29.6
    %
    
    
    35.6
    %Debt securities
    
    
    26.8
    
    
    
    32.8Cash
    
    
    21.8
    
    
    
    6.8Life insurance company general accounts
    
    
    21.1
    
    
    
    24.1Other
    
    
    0.7
    
    
    
    0.7100.0
    %
    
    
    100.0
    %
 87




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Canons investment policies are designed to ensure adequate plan assets
are available to provide future payments of pension benefits to eligible
participants. Taking into account the expected long-term rate of return
on plan assets, Canon formulates a model portfolio comprised of the
optimal combination of equity securities and debt securities. Plan assets
are invested in individual equity and debt securities using the guidelines
of the model portfolio in order to produce a total return that will
match the expected return on a mid-term to long-term basis. Canon
evaluates the gap between expected return and actual return of invested
plan assets on an annual basis to determine if such differences
necessitate a revision in the formulation of the model portfolio. Canon
revises the model portfolio when and to the extent considered necessary
to achieve the expected long-term rate of return on plan assets.Equity securities include common stock of the Company and certain of its
domestic subsidiaries in the amounts of Yen 796 million (0.2 percent of
total domestic plan assets) and Yen 1,477 million (0.4 percent of total
domestic plan assets) at December 31, 2003 and 2002, respectively.Cash flows
Canon expects to contribute Yen 40,044 million to its domestic defined
benefit plan in the year ending December 31, 2004.(11)
    
    Income Taxes
Total income taxes were allocated as follows: Millions of yen2003
    
    2002
    
    2001Income before income taxes and
minority interests
    
    Yen
    162,653
    
    
    
    134,703
    
    
    
    115,154Stockholders equity  accumulated
other comprehensive income (loss):Foreign currency translation
adjustments
    
    
    (3,469
    )
    
    
    2,387
    
    
    
    (684
    )Net unrealized gains and losses
on securities
    
    
    4,692
    
    
    
    (1,188
    )
    
    
    (11,692
    )Net losses on derivative
instruments
    
    
    27
    
    
    
    1,513
    
    
    
    (1,755
    )Minimum pension liability
adjustments
    
    
    39,738
    
    
    
    (10,680
    )
    
    
    (26,592
    )Yen
    203,641
    
    
    
    126,735
    
    
    
    74,431
 88




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Domestic and foreign components of income before income taxes and minority
interests (Income before income taxes), and the current and deferred
income tax expense (benefit) attributable to such income before income
taxes are summarized as follows: Millions of yenJapanese
    
    Foreign
    
    Total2003:Income before income taxes
    
    Yen
    337,093
    
    
    
    111,077
    
    
    
    448,170Income taxes:Current
    
    Yen
    132,204
    
    
    
    33,484
    
    
    
    165,688Deferred
    
    
    (5,828
    )
    
    
    2,793
    
    
    
    (3,035
    )Yen
    126,376
    
    
    
    36,277
    
    
    
    162,6532002:Income before income taxes
    
    Yen
    237,677
    
    
    
    92,340
    
    
    
    330,017Income taxes:Current
    
    Yen
    109,102
    
    
    
    27,389
    
    
    
    136,491Deferred
    
    
    (7,212
    )
    
    
    5,424
    
    
    
    (1,788
    )Yen
    101,890
    
    
    
    32,813
    
    
    
    134,7032001:Income before income taxes
    
    Yen
    230,456
    
    
    
    51,110
    
    
    
    281,566Income taxes:Current
    
    Yen
    95,664
    
    
    
    17,318
    
    
    
    112,982Deferred
    
    
    (1,738
    )
    
    
    3,910
    
    
    
    2,172Yen
    93,926
    
    
    
    21,228
    
    
    
    115,154
  The Company and certain of its domestic subsidiaries are subject to a
corporate tax of 30%, an inhabitant tax of 9.8% and a deductible business
tax of 6%, which in the aggregate resulted in a statutory income tax rate
of approximately 42%.Amendments to the Japanese tax regulations were enacted on March 24, 2003.
As a result of these amendments, the statutory income tax rate was
reduced from approximately 42% to 40% effective from the year beginning
January 1, 2005. Consequently, the statutory tax rate is to be lowered to
approximately 40% applicable for deferred tax assets and liabilities
expected to be settled or realized subsequent to January 1, 2005. The
adjustments of deferred tax assets and liabilities for this change in the
tax rate are Yen 3,613 million and have been reflected in the consolidated
statements of income for the year ended December 31, 2003. 89




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  A reconciliation of the Japanese statutory income tax rate and the
effective income tax rate as a percentage of income before income taxes is
as follows: 2003
    
    2002
    
    2001Japanese statutory income tax rate
    
    
    42.0
    %
    
    
    42.0
    %
    
    
    42.0
    %Increase (reduction) in income taxes resulting from:Expenses not deductible for tax purposes
    
    
    0.2
    
    
    
    0.5
    
    
    
    1.4Tax benefits not recognized on operating
losses of subsidiaries
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.9Income of foreign subsidiaries taxed at lower
than Japanese normal tax rate
    
    
    (2.5
    )
    
    
    (2.5
    )
    
    
    (2.0
    )Tax credit for increased research and development
expenses
    
    
    (1.4
    )
    
    
    (1.6
    )
    
    
    (2.1
    )Effect of enacted changes in tax laws and rates on research
and development expenses
    
    
    (2.6
    )
    
    
    
    
    
    
    Effect of enacted changes in tax laws and rates on business
taxes
    
    
    0.8
    
    
    
    
    
    
    
    Other
    
    
    (0.3
    )
    
    
    2.2
    
    
    
    0.7Effective income tax rate
    
    
    36.3
    %
    
    
    40.8
    %
    
    
    40.9
    %
  Net deferred income tax assets and liabilities are reflected on the
accompanying consolidated balance sheets under the following captions: Millions of yen2003
    
    2002Prepaid expenses and other current assets
    
    Yen
    44,198
    
    
    
    42,386Other assets
    
    
    124,706
    
    
    
    167,298Other current liabilities
    
    
    (2,575
    )
    
    
    (1,213
    )Other noncurrent liabilities
    
    
    (19,302
    )
    
    
    (16,120
    )Yen
    147,027
    
    
    
    192,351
 90




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2003 and 2002 are presented below: Millions of yen2003
    
    2002Deferred tax assets:Inventories
    
    Yen
    13,540
    
    
    
    12,813Accrued business tax
    
    
    8,684
    
    
    
    6,794Accrued pension and severance cost
    
    
    45,149
    
    
    
    42,253Minimum pension liability adjustments
    
    
    56,526
    
    
    
    97,454Research and development  costs
capitalized for tax purposes
    
    
    20,766
    
    
    
    21,215Property, plant and equipment
    
    
    17,074
    
    
    
    14,699Net operating losses carried forward
    
    
    6,279
    
    
    
    6,119Other
    
    
    35,624
    
    
    
    41,137Total gross deferred tax assets
    
    
    203,642
    
    
    
    242,484Less valuation allowance
    
    
    8,401
    
    
    
    9,683Net deferred tax assets
    
    
    195,241
    
    
    
    232,801Deferred tax liabilities:Land including deferred gain on sale
    
    
    (2,059
    )
    
    
    (2,540
    )Undistributed earnings of foreign
subsidiaries
    
    
    (6,424
    )
    
    
    (10,002
    )Net unrealized gains on securities
    
    
    (4,521
    )
    
    
    (400
    )Other
    
    
    (35,210
    )
    
    
    (27,508
    )Total gross deferred tax liabilities
    
    
    (48,214
    )
    
    
    (40,450
    )Net deferred tax assets
    
    Yen
    147,027
    
    
    
    192,351
  The valuation allowance for deferred tax assets as of January 1, 2002
was Yen 12,875 million. The net changes in the total valuation allowance
for the years ended December 31, 2003 and 2002 were decreases of Yen 1,282
million and Yen 3,192 million, respectively.Based upon the level of historical taxable income and projections for
future taxable income over the periods which the net deductible temporary
differences are expected to reverse, management believes it is more likely
than not that Canon will realize the benefits of these deferred tax
assets, net of the existing valuation allowances at December 31, 2003.At December 31, 2003, Canon had net operating losses carried forward for
income tax purposes of approximately Yen 18,679 million which were
available to reduce future taxable income, if any. Periods available to
reduce future taxable income vary in each tax jurisdiction and range from
one year to an indefinite period as follows: Millions of yenWithin one year
    
    Yen
    816After one year through five years
    
    
    10,566After five years through ten years
    
    
    2,771Indefinite period
    
    
    4,526Total
    
    Yen
    18,679
 91




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Income taxes have not been accrued on undistributed earnings of domestic
subsidiaries as the tax law provides a means by which the investment in a
domestic subsidiary can be recovered tax free.Canon has not recognized deferred tax liabilities of approximately Yen
36,661 million for the portion of undistributed earnings of foreign
subsidiaries that arose in the year ended December 31, 2003 and prior
years because Canon currently does not expect those unremitted earnings to
reverse and become taxable to the Company in the foreseeable future.
Deferred tax liabilities will be recognized when Canon expects that it
will recover those undistributed earnings in a taxable manner, such as
through receipt of dividends or sale of the investments. As of December
31, 2003, such undistributed earnings of these subsidiaries were
approximately Yen 420,828 million.(12)
    
    Common Stock
During the years ended December 31, 2003, 2002 and 2001, the Company
issued 2,202,401 shares, 2,853,912 shares and 655,309 shares of
common stock, respectively. The issuance of 243,360 shares during
the year ended December 31, 2002 was in connection with the
acquisition of the outstanding minority ownership interest of 37% of
Canon Components, Inc. The acquisition of the minority interest was
consummated on May 1, 2002, whereby Canon Components Inc. became a
wholly-owned subsidiary of the Company. The remaining issuance of
the shares of the Company was in connection with conversion of
convertible debt. Conversion into common stock of convertible debt
issued subsequent to October 1, 1982 has been accounted for by
crediting one-half of the conversion price and exercise price to each
of the common stock account and the additional paid-in capital
account.(13)
    
    Legal Reserve and Cash Dividends
The Japanese Commercial Code, amended effective on October 1, 2001,
provides that an amount equal to at least 10% of appropriations paid
in cash be appropriated as a legal reserve until an aggregated amount
of additional paid-in capital and the legal reserve equals 25% of
common stock. Certain foreign subsidiaries are also required to
appropriate their earnings to legal reserves under the laws of the
respective countries. Canons equity in retained earnings or deficit
of affiliated companies of which it owns 20% to 50% accounted for on
the equity basis aggregating positive Yen 5,887 million at December
31, 2003 is included in retained earnings.Cash dividends and appropriations to the legal reserve charged to
retained earnings during the years ended December 31, 2003, 2002 and
2001 represent dividends paid out during those years and the related
appropriations to the legal reserve. Provision has not been made in
the accompanying consolidated financial statements for the dividend
for the second half year of Yen 35 per share, aggregating Yen 30,791
million, proposed subsequent to December 31, 2003 by the Board of
Directors in respect of the year ended December 31, 2003. 92




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  The amount available for dividends under the Japanese Commercial Code is
based on the amount recorded in the Companys nonconsolidated books of
account in accordance with financial accounting standards of Japan. The
adjustments, included in the accompanying consolidated financial
statements in order to conform them to accounting principles generally
accepted in the United States of America, but not recorded in the books of
account, have no effect on the determination of retained earnings
available for dividends under the Japanese Commercial Code. The amount
available for dividends in the Companys nonconsolidated books of account
under the Japanese Commercial Code amounted to Yen 944,769 million at
December 31, 2003.(14)
    
    Noncash Financing Activities
In the years ended December 31, 2003, 2002 and 2001, common stock and
additional paid-in capital arising from conversion of convertible
debt amounted to Yen 3,297 million, Yen 3,908 million and Yen 981
million, respectively.As a result of the acquisition of the outstanding minority ownership
interest of Canon Components Inc. and the issuance of common stock in
connection with the acquisition during the year ended December 31,
2002, goodwill classified as other assets and additional paid-in
capital increased by Yen 795 million and Yen 1,052 million,
respectively, and minority interests decreased by Yen 257 million.(15)
    
    Other Comprehensive Income (Loss)
Change in accumulated other comprehensive income (loss) is as follows: Millions of yen2003
    
    2002
    
    2001Foreign currency translation adjustments:Balance at beginning of year
    
    Yen
    (68,524
    )
    
    
    (52,660
    )
    
    
    (104,149
    )Adjustments for the year
    
    
    (15,277
    )
    
    
    (15,864
    )
    
    
    51,489Balance at end of year
    
    
    (83,801
    )
    
    
    (68,524
    )
    
    
    (52,660
    )Net unrealized gains and losses on securities:Balance at beginning of year
    
    
    (1,168
    )
    
    
    564
    
    
    
    14,167Adjustments for the year
    
    
    7,952
    
    
    
    (1,732
    )
    
    
    (13,603
    )Balance at end of year
    
    
    6,784
    
    
    
    (1,168
    )
    
    
    564Net losses on derivative instruments:Balance at beginning of year
    
    
    (334
    )
    
    
    (2,423
    )
    
    
    Adjustments for the year
    
    
    37
    
    
    
    2,089
    
    
    
    (2,423
    )Balance at end of year
    
    
    (297
    )
    
    
    (334
    )
    
    
    (2,423
    )Minimum pension liability adjustments:Balance at beginning of year
    
    
    (96,441
    )
    
    
    (80,649
    )
    
    
    (56,600
    )Adjustments for the year
    
    
    30,480
    
    
    
    (15,792
    )
    
    
    (24,049
    )Balance at end of year
    
    
    (65,961
    )
    
    
    (96,441
    )
    
    
    (80,649
    )Total accumulated other comprehensive income (loss):Balance at beginning of year
    
    
    (166,467
    )
    
    
    (135,168
    )
    
    
    (146,582
    )Adjustments for the year
    
    
    23,192
    
    
    
    (31,299
    )
    
    
    11,414Balance at end of year
    
    Yen
    (143,275
    )
    
    
    (166,467
    )
    
    
    (135,168
    )
 93




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##### Table of Contents



CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Tax effects allocated to each component of other comprehensive income
(loss) and reclassification adjustments are as follows: Millions of yenBefore-tax
    
    Tax (expense)
    
    Net-of-taxamount
    
    or benefit
    
    amount2003:Foreign currency translation adjustments:Amount arising during the year
    
    Yen
    (19,115
    )
    
    
    3,469
    
    
    
    (15,646
    )Reclassification adjustments for
gains and
losses realized in net income
    
    
    369
    
    
    
    
    
    
    
    369Net change during the year
    
    
    (18,746
    )
    
    
    3,469
    
    
    
    (15,277
    )Net unrealized gains and losses on
securities:Amount arising during the year
    
    
    12,129
    
    
    
    (4,477
    )
    
    
    7,652Reclassification adjustments for
gains and
losses realized in net income
    
    
    515
    
    
    
    (215
    )
    
    
    300Net change during the year
    
    
    12,644
    
    
    
    (4,692
    )
    
    
    7,952Net losses on derivative instruments:Amount arising during the year
    
    
    (726
    )
    
    
    305
    
    
    
    (421
    )Reclassification adjustments for
gains and
losses realized in net income
    
    
    790
    
    
    
    (332
    )
    
    
    458Net change during the year
    
    
    64
    
    
    
    (27
    )
    
    
    37Minimum pension liability adjustments
    
    
    70,218
    
    
    
    (39,738
    )
    
    
    30,480Other comprehensive income (loss)
    
    Yen
    64,180
    
    
    
    (40,988
    )
    
    
    23,192Millions of yenBefore-tax
    
    Tax (expense)
    
    Net-of-taxamount
    
    or benefit
    
    amount2002:Foreign currency translation adjustments:Amount arising during the year
    
    Yen
    (13,521
    )
    
    
    (2,908
    )
    
    
    (16,429
    )Reclassification adjustments for
gains and
losses realized in net income
    
    
    44
    
    
    
    521
    
    
    
    565Net change during the year
    
    
    (13,477
    )
    
    
    (2,387
    )
    
    
    (15,864
    )Net unrealized gains and losses on
securities:Amount arising during the year
    
    
    (2,331
    )
    
    
    872
    
    
    
    (1,459
    )Reclassification adjustments for
gains and
losses realized in net income
    
    
    (589
    )
    
    
    316
    
    
    
    (273
    )Net change during the year
    
    
    (2,920
    )
    
    
    1,188
    
    
    
    (1,732
    )Net losses on derivative instruments:Amount arising during the year
    
    
    (1,052
    )
    
    
    442
    
    
    
    (610
    )Reclassification adjustments for
gains and
losses realized in net income
    
    
    4,654
    
    
    
    (1,955
    )
    
    
    2,699Net change during the year
    
    
    3,602
    
    
    
    (1,513
    )
    
    
    2,089Minimum pension liability adjustments
    
    
    (26,472
    )
    
    
    10,680
    
    
    
    (15,792
    )Other comprehensive income (loss)
    
    Yen
    (39,267
    )
    
    
    7,968
    
    
    
    (31,299
    )
 94




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Millions of yenBefore-tax
    
    Tax (expense)
    
    Net-of-taxamount
    
    or benefit
    
    amount2001:Foreign currency translation adjustments:Amount arising during the year
    
    Yen
    50,823
    
    
    
    684
    
    
    
    51,507Reclassification adjustments for
gains and
losses realized in net income
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )Net change during the year
    
    
    50,805
    
    
    
    684
    
    
    
    51,489Net unrealized gains and losses on
securities:Amount arising during the year
    
    
    (8,434
    )
    
    
    4,535
    
    
    
    (3,899
    )Reclassification adjustments for
gains and
losses realized in net income
    
    
    (16,861
    )
    
    
    7,157
    
    
    
    (9,704
    )Net change during the year
    
    
    (25,295
    )
    
    
    11,692
    
    
    
    (13,603
    )Net losses on derivative instruments:Amount arising during the year
    
    
    (11,146
    )
    
    
    4,681
    
    
    
    (6,465
    )Reclassification adjustments for
gains and
losses realized in net income
    
    
    6,968
    
    
    
    (2,926
    )
    
    
    4,042Net change during the year
    
    
    (4,178
    )
    
    
    1,755
    
    
    
    (2,423
    )Minimum pension liability adjustments
    
    
    (50,641
    )
    
    
    26,592
    
    
    
    (24,049
    )Other comprehensive income (loss)
    
    Yen
    (29,309
    )
    
    
    40,723
    
    
    
    11,414
  (16)
    
    Earnings per Share
A reconciliation of the numerators and denominators of basic and
diluted earnings per share for Income before cumulative effect of
change in accounting principle computations is as follows: Millions of yen2003
    
    2002
    
    2001Income before cumulative
effect of change in
accounting principle
    
    Yen
    275,730
    
    
    
    190,737
    
    
    
    163,869Effect of dilutive securities:1% Japanese yen
convertible debentures,
due 2002
    
    
    
    
    
    
    26
    
    
    
    401-2/10% Japanese yen
convertible debentures,
due 2005
    
    
    36
    
    
    
    48
    
    
    
    481-3/10% Japanese yen
convertible debentures,
due 2008
    
    
    86
    
    
    
    91
    
    
    
    91Diluted income before
cumulative effect of
change in accounting
principle
    
    Yen
    275,852
    
    
    
    190,902
    
    
    
    164,048
 95




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CANON INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements Number of shares2003
    
    2002
    
    2001Average common shares
outstanding
    
    
    878,648,844
    
    
    
    876,716,443
    
    
    
    875,960,380Effect of dilutive securities:1% Japanese yen
convertible debentures,
due 2002
    
    
    
    
    
    
    1,952,315
    
    
    
    2,859,4621-2/10% Japanese yen
convertible debentures,
due 2005
    
    
    2,664,354
    
    
    
    3,446,071
    
    
    
    3,461,2291-3/10% Japanese yen
convertible debentures,
due 2008
    
    
    6,382,560
    
    
    
    6,624,428
    
    
    
    6,646,369Diluted common shares
outstanding
    
    
    887,695,758
    
    
    
    888,739,257
    
    
    
    888,927,440Yen2003
    
    2002
    
    2001Earnings per share before
cumulative effect of
change in accounting
principle:Basic
    
    Yen
    313.81
    
    
    
    217.56
    
    
    
    187.07Diluted
    
    
    310.75
    
    
    
    214.80
    
    
    
    184.55
  The computation of diluted net income per share for the year ended
December 31, 2001 uses diluted net income and diluted common shares
outstanding. For the computation of the diluted net income, the same
effect of dilutive securities used for the computation of diluted income
before cumulative effect of change in accounting principle is reflected.
The diluted common shares outstanding is the same as used in the
computation of the diluted earnings per share before cumulative effect of
change in accounting principle.(17)
    
    Derivatives and Hedging ActivitiesRisk management policy
Canon operates internationally, exposing it to the risk of changes in
foreign exchange rates and interest rates. Derivative financial
instruments are comprised principally of foreign exchange contracts
and interest rate swaps utilized by the Company and certain of its
subsidiaries to reduce these risks. Canon assesses foreign currency
exchange rate risk and interest rate risk by continually monitoring
changes in these exposures and by evaluating hedging opportunities.
Canon does not hold or issue derivative financial instruments for
trading purposes. Canon is also exposed to credit-related losses in
the event of non-performance by counterparties to derivative
financial instruments, but it is not expected that any counterparties
will fail to meet their obligations, because most of the
counterparties are internationally recognized financial institutions
and contracts are diversified across a number of major financial
institutions. 96




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Foreign currency exchange rate risk management
The major manufacturing bases of Canon are located in Japan and Asia. The
sales generated from overseas are mainly denominated in U.S. dollar or
euro. Therefore, Canons international operations expose Canon to the
risk of changes in foreign currency exchange rates. Canon uses foreign
exchange contracts to manage certain foreign currency exchange exposures
principally from the exchange of U.S. dollar and euro into Japanese yen.
These contracts are primarily used to hedge the foreign currency exposure
of forecasted intercompany sales which are denominated in foreign
currencies. In accordance with Canons policy, a specific portion of
foreign currency exposure resulting from forecasted intercompany sales are
hedged using foreign exchange contracts which principally mature within
three months.Interest rate risk management
Canons exposure to the market risk of changes in interest rates relates
primarily to its debt obligations. The fixed-rate debt obligations expose
Canon to variability in their fair values due to changes in interest
rates. To manage the variability in fair values caused by interest rate
changes, Canon enters into interest rate swaps when it is determined to be
appropriate based on market conditions. The interest rate swaps change
the fixed-rate debt obligations to variable-rate debt obligations by
entering into receive-fixed, pay-variable interest rate swaps. The
hedging relationship between the interest rate swaps and its hedged debt
obligations is highly effective in achieving offsetting changes in fair
values resulting from interest rate risk.Fair value hedge
Derivative financial instruments designated as fair value hedges
principally relate to interest rate swaps associated with fixed rate debt
obligations. Changes in fair values of the hedged debt obligations and
derivative instruments designated as fair value hedges of these debt
obligations are recognized in other income (deductions). There is no
hedging ineffectiveness or net gains or losses excluded from the
assessment of hedge effectiveness for the years ended December 31, 2003
and 2002 as the critical terms of the interest rate swaps match the terms
of the hedged debt obligations.Cash flow hedge
Changes in the fair value of derivative financial instruments designated
and qualifying as cash flow hedges, including foreign exchange contracts
associated with forecasted intercompany sales and interest rate swaps
associated with variable rate debt obligation, are reported in accumulated
other comprehensive income (loss). These amounts are subsequently
reclassified into earnings through other income (deductions) in the same
period as the hedged items affect earnings. Substantially all accumulated
other comprehensive income (loss) at year end is expected to be recognized
in earnings over the next twelve months. Canon excludes the time value
component of the hedging instruments from the assessment of hedge
effectiveness.The effective portions of changes in the fair value of foreign exchange
contracts designated as cash flow hedges and reported in accumulated other
comprehensive income (loss), net of the related tax effect, are losses of
Yen 445 million, Yen 610 million and Yen 6,465 million for the years ended
December 31, 2003, 2002 and 2001. The amounts which were reclassified out
of accumulated other comprehensive income (loss) into other income
(deductions), net of the related tax effect, are net losses of Yen 674
million, Yen 2,699 million and Yen 4,042 million for the years ended
December 31, 2003, 2002 and 2001. The amounts of the hedging
ineffectiveness is not material for the years ended December 31, 2003,
2002 and 2001. The sum of the amount of net gains or losses excluded from
the assessment of hedge effectiveness which are also recorded in other
income (deductions), net of the related tax effect, are net gains of Yen
490 million, Yen 668 million and Yen 1,907 million for the years ended
December 31, 2003, 2002 and 2001. 97




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Canon has entered into certain foreign exchange contracts which do not
meet the hedging criteria of SFAS 133 and 138. Canon records these
foreign exchange contracts on the balance sheet at fair value. The
changes in fair values are recorded in earnings immediately. The notional
amounts of those foreign exchange contracts were Yen 408,540 million and
Yen 362,276 million at December 31, 2003 and 2002.The effective portions of changes in the fair value of interest rate swap
contracts designated as cash flow hedges and reported in accumulated other
comprehensive income (loss), net of the related tax effect, is a gain of
Yen 24 million for the year ended December 31, 2003. The amount which was
reclassified out of accumulated other comprehensive income (loss) into
other income (deductions), net of the related tax effect, is a net gain of
Yen 216 million for the year ended December 31, 2003. The amounts of the
hedging ineffectiveness is not material for the year ended December 31,
2003. The sum of the amount of net gains or losses excluded from the
assessment of hedge effectiveness which are also recorded in other income
(deductions), net of the related tax effect, is not material for the year
ended December 31, 2003.Canon has entered into certain interest rate swap agreements which do not
meet the hedging criteria of SFAS 133 and 138. Canon records these
interest rate swap agreements on the balance sheet at fair value. The
changes in fair values are recorded in earnings immediately. The notional
amount of those interest rate swap agreements was Yen 57,270 million at
December 31, 2002. Canon recognized net losses related to those interest
rate swaps in the amount of Yen 94 million, Yen 1,738 million and Yen
2,521 million for the years ended December 31, 2003, 2002 and 2001,
respectively, and classified such amount in other income (deductions).Contract amounts of foreign exchange contracts and interest rate swaps at
December 31, 2003 and 2002 are set forth below: Millions of yenU.S. dollars
    
    euro
    
    Other
    
    Total2003:To sell foreign currencies
    
    Yen
    232,013
    
    
    
    191,537
    
    
    
    23,993
    
    
    
    447,543To buy foreign currencies
    
    
    11,151
    
    
    
    3,261
    
    
    
    7,972
    
    
    
    22,384Receive-fixed interest rate swaps
    
    
    
    
    
    
    1,337
    
    
    
    
    
    
    
    1,337Pay-fixed interest rate swaps
    
    
    
    
    
    
    21,227
    
    
    
    
    
    
    
    21,2272002:To sell foreign currencies
    
    Yen
    262,408
    
    
    
    138,631
    
    
    
    21,757
    
    
    
    422,796To buy foreign currencies
    
    
    3,586
    
    
    
    2,307
    
    
    
    759
    
    
    
    6,652Receive-fixed interest rate swaps
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    180Pay-fixed interest rate swaps
    
    
    56,019
    
    
    
    1,251
    
    
    
    
    
    
    
    57,270
 98




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (18)
    
    Commitments and Contingent Liabilities
In November 2002, the Financial Accounting Standards Board issued
FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, as interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN 45
requires that a liability be recorded in the guarantors balance
sheet upon issuance of a guarantee. The initial recognition and
measurement provisions of FIN 45 were applicable to guarantees issued
or modified after December 31, 2002.Canon provides guarantees to third parties of bank loans of its
employees, affiliates and other companies. The guarantees for the
employees are principally made for their housing loans. The
guarantees of loans of its affiliates and other companies are made to
ensure that those companies operate with less risk of finance. For
each guarantee provided, Canon would have to perform under a
guarantee, if the borrower defaults on a payment within the contract
periods of 1 year to 30 years in the case of employees with housing
loans, and of 1 year to 10 years in the case of affiliates and other
companies. The maximum amount of undiscounted payments Canon would
have had to make in the event of default is Yen 58,299 million at
December 31, 2003. The carrying amounts of the liabilities
recognized for Canons obligations as a guarantor under those
guarantees at December 31, 2003 were insignificant. Certain of those
guarantees secured by guarantees issued to Canon by other parties
amounted to Yen 950 million at December 31, 2003.Canon Inc. and its consolidated subsidiaries provide guarantees to
third parties of certain obligations of their consolidated
subsidiaries. At December 31, 2003, these guarantees amounted to Yen
55,730 million. To a lesser extent, consolidated subsidiaries
provide guarantees to third parties of obligations of other
consolidated subsidiaries. All intercompany guarantees are
eliminated in consolidation and therefore are not reflected in the
above figure.At December 31, 2003, commitments outstanding for the purchase of
property, plant and equipment approximated Yen 54,947 million.Canon occupies sales offices and other facilities under lease
arrangements accounted for as operating leases. Deposits made under
such arrangements aggregated Yen 15,092 million and Yen 18,133
million at December 31, 2003 and 2002, respectively, and are
reflected in noncurrent receivables on the accompanying consolidated
balance sheets.Canon is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material
adverse effect on Canons consolidated financial position, results of
operations, or cash flows. 99




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Future minimum lease payments required under capital and noncancellable
operating leases that have initial or remaining lease terms in excess of
one year as of December 31, 2003 are as follows: Millions of yenCapital
    
    OperatingLeases
    
    LeasesYear ending December 31:2004
    
    Yen
    5,200
    
    
    
    11,7692005
    
    
    3,986
    
    
    
    8,5912006
    
    
    1,244
    
    
    
    6,7132007
    
    
    561
    
    
    
    5,1292008
    
    
    204
    
    
    
    3,926Later years
    
    
    72
    
    
    
    7,302Total future minimum lease
payments
    
    Yen
    11,267
    
    
    
    43,430
  Canon also issues contractual product warranties under which it
generally guarantees the performance of products delivered and services
rendered for a certain period or term. Changes in accrued product
warranty cost for the year ended December 31, 2003 and 2002 are summarized
as follows: Millions of yen2003
    
    2002Balance at beginning of year
    
    Yen
    7,516
    
    
    
    7,038Addition
    
    
    10,919
    
    
    
    8,351Utilization
    
    
    (7,834
    )
    
    
    (7,763
    )Other
    
    
    (89
    )
    
    
    (110
    )Balance at end of year
    
    Yen
    10,512
    
    
    
    7,516
  (19)
    
    Disclosures about the Fair Value of Financial InstrumentsCash and cash equivalents, Trade receivables, Short-term loans, Trade payables, Accrued expenses
The carrying amount approximates fair value because of the short
maturity of these instruments.Marketable securities and Investments
The fair values of Canons marketable securities and investments are
based on quoted market prices.Noncurrent receivables
The fair values of Canons noncurrent receivables are based on the
present value of future cash flows through estimated maturity,
discounted using estimated market discount rates. Their carrying
amounts at December 31, 2003 and 2002 totaled Yen 16,543 million and
Yen 20,568 million, respectively, which approximate fair values
because of their short duration. 100




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  Long-term debt
The fair values of Canons long-term debt instruments are based on the
quoted price in the most active market or the present value of future cash
flows associated with each instrument discounted using Canons current
borrowing rate for similar debt instruments of comparable maturity.Derivative financial instruments
The fair values of derivative financial instruments, consisting
principally of foreign exchange contracts and interest rate swaps, all of
which are used for purposes other than trading, are estimated by obtaining
quotes from brokers.The estimated fair values of Canons financial instruments at December 31,
2003 and 2002 are summarized as follows: Millions of yen2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueNonderivatives:Assets:Marketable securities
and Investments
    
    Yen
    55,430
    
    
    
    55,430
    
    
    
    41,285
    
    
    
    41,285Liabilities:Long-term debt,
including current
installments
    
    
    (95,455
    )
    
    
    (123,700
    )
    
    
    (100,355
    )
    
    
    (132,574
    )Derivatives relating to:Forecasted intercompany
sales transactions:Assets
    
    
    347
    
    
    
    347
    
    
    
    808
    
    
    
    808Liabilities
    
    
    (1,093
    )
    
    
    (1,093
    )
    
    
    (622
    )
    
    
    (622
    )Trade receivables:Assets
    
    
    3,413
    
    
    
    3,413
    
    
    
    3,851
    
    
    
    3,851Liabilities
    
    
    (6,604
    )
    
    
    (6,604
    )
    
    
    (2,938
    )
    
    
    (2,938
    )Long-term debt,
including current
installments:Interest rate swaps:Assets
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Liabilities
    
    
    (55
    )
    
    
    (55
    )
    
    
    (1,149
    )
    
    
    (1,149
    )
  Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates. 101




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CANON INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements  (20)
    
    Supplementary Expense Information Millions of yen2003
    
    2002
    
    2001Research and development
    
    Yen
    259,140
    
    
    
    233,669
    
    
    
    218,616Depreciation of property,
plant and equipment
    
    
    168,636
    
    
    
    158,469
    
    
    
    147,286Rent
    
    
    42,131
    
    
    
    44,195
    
    
    
    47,558Advertising
    
    
    100,278
    
    
    
    71,725
    
    
    
    66,837Exchange losses
    
    
    20,311
    
    
    
    23,468
    
    
    
    14,801
 102




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CANON INC. AND SUBSIDIARIES 
 Valuation and Qualifying Accounts Years ended December 31, 2003, 2002 and 2001 AddBalance at
    
    Add
    
    Deduct
    
    (deduct)
    
    Balancebeginning of
    
    charge to
    
    bad debts
    
    translation
    
    at end ofperiod
    
    income
    
    written off
    
    adjustments
    
    period(Millions of yen)Year ended December 31, 2003:Allowance for doubtful Receivables
    
    Yen
    12,031
    
    
    Yen
    5,232
    
    
    Yen
    2,878
    
    
    Yen
    38
    
    
    Yen
    14,423Year ended December 31, 2002:Allowance for doubtful Receivables
    
    Yen
    11,091
    
    
    Yen
    6,027
    
    
    Yen
    3,997
    
    
    Yen
    (1,090
    )
    
    Yen
    12,031Year ended December 31, 2001:Allowance for doubtful Receivables
    
    Yen
    11,617
    
    
    Yen
    4,284
    
    
    Yen
    5,689
    
    
    Yen
    879
    
    
    Yen
    11,091
 103




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Item 18.   Financial Statements Not applicable. 
 Item 19.   Financial Statements and Exhibits  (a)
    
    Following Consolidated financial statements and Schedule are listed in
Item 17. Financial Statements. Consolidated financial statements of Canon Inc. and Subsidiaries:  Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2003 and 2002Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001Consolidated Statements of Stockholders Equity for the years ended December 31, 2003, 2002 and 2001Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001Notes to Consolidated Financial Statements Schedule:  Report of Independent Registered Public Accounting Firm on ScheduleSchedule II Valuation and Qualifying Accounts for the years ended December 31, 2003, 2002 and 2001(b)
    
    Following Exhibits are listed in Item 19. Financial Statements and Exhibits. Exhibit:  1.1
    
    Articles of Incorporation of Canon Inc. (Translation)1.2
    
    Regulations Of the Board of Directors of Canon Inc. (Translation)2
    
    Regulations for Handling of Shares of Canon Inc. (Translation)11.1
    
    Canon Group Code of Conduct (Translation)11.2
    
    Code of Ethics (Supplement to The Canon Group Code of Conduct) (Translation)12
    
    302 Certification13
    
    906 Certification 104




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SIGNATURES Pursuant to the requirements of Section 12 of the
Securities Exchange Act of 1934, as amended, the
registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly
caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly
authorized. CANON INC.
(Registrant)By:
    /s/ Toshizo Tanaka(Senior Managing Director,Group Executive of Finance and
Accounting Headquarters)Canon INC.
30-2, Shimomaruko 3-chome,
Ohta-ku, Tokyo 146-8501, Japan Date:  June 4, 2004 105




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EXHIBIT INDEX Exhibit number
    
    TitleExhibit 1.1
    
    Articles of Incorporation of Canon Inc. (Translation)Exhibit 1.2
    
    Regulations Of the
Board of Directors of Canon Inc. (Translation)Exhibit 2
    
    Regulations for Handling of Shares of Canon Inc. (Translation)Exhibit 11.1
    
    Canon Group Code of Conduct (Translation)Exhibit 11.2
    
    Code of Ethics (Supplement to The Canon Group Code of Conduct) (Translation)Exhibit 12
    
    302 CertificationExhibit 13
    
    906 Certification
 106